China's democracy movement has moved in fits and starts since the 1989 Tiananmen Square massacre. But a manifesto issued this week marks a brave new chapter in the fight for political freedom.

More than 400 Chinese citizens living inside China published "Charter 08" on the Internet. The document calls for a new constitution to establish multiparty democracy and includes a scathing account of Communist rule. It describes its ambition for a political system in which the military, courts, schools and churches are accountable to the constitution rather than to a political party.

In a year that has seen a crackdown on political dissent, especially during the Olympics and March Tibet protests, this is a bold step, and the authors don't mince words: "Our political system continues to produce human rights disasters and social crises." It continues: "[A]s the ruling elite continues with impunity to crush and to strip away the rights of citizens to freedom, to property, and to the pursuit of happiness, we see the powerless in our society . . . becoming more militant and raising the possibility of a violent conflict of disastrous proportions. The decline of the current system has reached the point where change is no longer optional."

An introduction to the charter by American Sinologist Perry Link -- who translated it into English -- likens it to Charter 77, the document signed by Vaclav Havel and other Czechoslovakian dissidents in 1977. Like those dissidents, two signers of Charter 08 were detained by police this week and about a dozen have been questioned, according to Amnesty International.

The Czech dissidents waited 13 years to realize their democratic dream. In China, the reality of self-government also seems far off and Charter 08 won't produce immediate change. But the boldness and bravery of its statement suggest that the democrats' day will come.

Geopolitical Diary: Freedom of Speech and Beijing's 'Test' January 16, 2009An article promoting freedom of speech in China — published on Wednesday in the Beijing Daily News, a periodical affiliated with the Beijing committee of the Communist Party of China (CPC) — was being circulated and discussed in China on Thursday. The piece, titled “Truth Cannot Be Pursued Without Freedom of Speech; ‘Authoritative Determination of Nature’ Should Be Avoided By All Means” and published in the paper’s “Theory Weekly” column, criticizes authorities who try to act as a “judge of truth” and stifle dissenting opinions. Written by Shen Minte, a professor at the Communication University of China, the article delivers a subtle warning to officials not to quiet alternative voices hastily; it also suggests, however, that tolerance for alternative voices does not justify alternative actions — only ideas.

The article notes that freedom of speech is guaranteed by the Chinese constitution, and cautions that one cannot determine whether speech is absurd, progressive or reactionary if it is never allowed to be vocalized. Shen links his call for freedom of speech to Mao Zedong’s support for “a hundred schools of thought contending” — though in this, Chen appears to be subtly criticizing the ultimate outcome of the ensuing “hundred flowers blooming” movement, in which open debate was finally crushed once it became too critical of the CPC.

Shen says it is only in the open, and through the lens of history, that alternative ideas can be judged. He warns that the biggest threat comes when some “authority” declares itself the “judge of truth” and the masses follow blindly, endorsing or condemning the ideas based solely on the judgment of vocal authorities rather than judging the truth themselves. He raises as examples Ma Yinchu and Zhang Zhixin, two early Party members who raised ideas fundamentally contrary to conventional wisdom or the actions of the Party. Ma warned of the dangers of excessive population growth, and Zhang criticized the Cultural Revolution. Both were criticized, quieted and punished — in Zhang’s case, executed — but years later were proven correct in their assessments and were rehabilitated.

In essence, Shen, in a Party-sanctioned paper, is calling for freedom of speech and debate inside the Party, along with a greater responsibility for the citizens of China to test what their officials say, and for those officials to listen more to the people. Shen makes it clear that he is not advocating freedom of action, but only of speech and debate. But his article is a strong criticism of the way some Chinese officials have acted in the past.

It is also a critique of China’s culture of official corruption. The article was published the same day the CPC Central Commission for Discipline Inspection (CCDI) called for greater efforts to crack down on corruption in 2009 and reported that nearly 5,000 officials above the county-head level had been investigated and penalized in the year ending in November 2008. Then on Thursday, Prim Minister Wen Jiabao, speaking to a conference of central and state agencies of the CPC, warned that China and the Party face a “test” in 2009 amid the global economic crisis. He called on Party members and government officials to be models of proper behavior and not to abuse their power or positions for personal gain, and to work together for economic growth.

For China’s central leadership, Shen’s message is both welcome and dangerous. Encouraging greater citizen oversight and more input is seen as a necessary tool to help rein in corruption and rebuild trust in the Party and government. In addition, the central government has been seeking a wider variety of inputs in policy-making from academia, research institutes and government think-tanks. At the same time, one of the government’s biggest fears is losing control of its citizens: of social unrest and organized opposition rising up and bringing down the Party.

As with the Beijing Daily News’ October 2006 publication of Yu Keping’s influential and controversial article, “Democracy Is A Good Thing,” Shen’s article is designed to stimulate debate, but keep things within manageable parameters. Both Shen and Yu made it a point in their articles to avoid overstating the case. Neither promotes the end of the Party or even radical reform — just gradual change within limits — and both caution that their ideas should not be taken too far. Yu praises democracy but also explains its shortfalls, while Shen warns that freedom of speech goes both ways, arguing that both sides need space to express themselves and that neither side should take action based solely on its own ideas.

The publication of articles such as these sheds light on the way the CPC is trying to cope with its role in a changing China. The CPC, to some extent, has outlived itself. Economic reforms and the social and political changes that go along with them are outpacing the Party. The CPC is no longer at the forefront of the ideology as it once was; it is no longer able simply to promise people economic improvement, as it did through the 1980s and into the 1990s. Instead, the Party is struggling for relevance at the center of a changed China. It has recognized the need to change, but many Party functionaries have devolved from the leaders of the people into a group of individuals who are stuck in a bureaucracy or living in a system of collusion, self-aggrandizement and personal power relationships.

This has left the CPC weak and unable to function as a unit. It also has reduced the stature of the Party as a whole in the eyes of the populace. The people may not be actively trying to overthrow the government, but neither do they have respect for it. When they are not allowed to express their opinions, their frustrations and tensions may explode into protest and violence. Yet when they are allowed to express themselves, that too can become a threat to the Party itself.

This is Beijing’s dilemma. The Party cannot allow open opposition — but neither can it retain the loyalty of the people, and its own authority, if it does not allow the people to keep the officials honest.

Articles like Shen’s are exposing the failures and weaknesses of the Party, and are calling for gradual change (at least in mindset). However, they also are being used to try to revive the Party, and to try to help it adapt to a changed China. Beijing’s hope is to build some sense of public oversight to hold the Party officials accountable, but without actually allowing the people to challenge the authority of the CPC.

It is not an easy balance to strike, and in the end it may not work. But there are those in the CPC who know that if the Party does not change and adapt, it will die.

January 22, 2009The Truth About China's Growthby Derek Scissors, Ph.D.WebMemo #2238China just announced its economic results for 2008. The headline real GDP growth figure was 9.0 percent, featuring a drop to 6.8 percent, year-on-year, in the fourth quarter.The only thing certain about these figures is that they are wrong.

Almost every year, all Chinese provinces report larger GDP gains than the already-published national "average." This trend held true for the first three quarters of 2008.[1] Over the past decade, all counties within a province have frequently reported larger gains than the provincial "average." Similarly, basic macroeconomic accounting, such as that used to calculate the components of GDP, does not work with China's numbers. For political reasons, the PRC knowingly measures a crucial figure for unemployment incorrectly, understating the amount by a factor of two or three.

Beijing purports to be able to complete its annual economic surveys in less than half the time required by the U.S., despite having one billion more people to account for and much less in the way of resources with which to do so. Not surprisingly, then, China now calculates 2007 real GDP growth at 13.0 percent, having first estimated 11.4 percent. These revisions have important implications for assessing the 2008 data.

Official data on the economy are whatever the Communist Party wants--close to the mark, too low, or too high.[2] While surety is impossible, the available evidence indicates true growth for 2008 is far lower than officially announced. Reasons for general cynicism stem from deliberate obfuscation and internal inconsistency in official statistics. Reason to believe official GDP growth is greatly overstated come from old official statistics on GDP and power consumption.

More Reasons for Cynicism

Official GDP is 30.07 trillion yuan (about $4.4 trillion). The revised figure for 2007 was 25.73 trillion yuan.[3] This is a nominal growth rate of 16.9 percent and, thus, an implicit GDP deflator of 7.9 percent. The latter is considerably larger than the 5.9 percent increase in the official consumer price index but not wildly larger. So far, so good.

For the fourth quarter, official data imply GDP was 9.90 trillion yuan. However, this cannot be directly compared to GDP for the fourth quarter of 2007 because there is no revision available for the individual quarters of 2007 but only for the full year. This has been true since China began revising data in 2005--basic quarterly GDP cannot be verified.

Worse, the same is true for all major parts of the economy. Investment and consumption were presumably revised for 2007 because GDP was revised. But changes in these components were not announced, so their fourth-quarter growth cannot be determined either. For that matter, it is not known if official growth for the first three quarters is still correct, for GDP or anything else. Nor will these figures be released in systematic fashion later. Some follow-on revisions spill out unannounced at random times; some are never made public. Chinese economic data is permanently unverifiable.

Consumption Illusion

On closer inspection, the picture is no better. The benchmark measure for consumption is retail sales. This is followed with great interest within and without China on hopes that consumption will begin to drive the Chinese and even the world economy. In the fourth quarter, global consumption took a heavy blow, but implied (from incomplete revisions) growth in Chinese retail sales was over 20 percent, on-year. For 2008 as a whole, retail sales soared 21.6 percent. This is a 13-year high and considerably faster than the (unrevised) 16.8 percent rise in 2007.[4]

Unfortunately, such an increase is very hard to believe. Passenger car sales added 7.3 percent in 2008, much slower than the 21.7 percent jump registered in 2007.[5] Sales of residential real estate plunged an unprecedented 21 percent through November.[6] What are Chinese consumers buying? Not imports. Import volume--the only verifiable element of consumption--fell 8.8 percent in the fourth quarter.

While all this is disturbing, there is a more fundamental problem. Per capita rural income was said to climb 15 percent in 2008 while per capita urban income climbed 14.5 percent. Real urban income somehow accelerated noticeably in the fourth quarter though GDP decelerated sharply. Even if that is true, incomes trailed sales by a good margin.

This should indicate that personal savings growth was small, as most income went to spending. But household deposits soared 26.6 percent. Individual Chinese are said to be both spending and saving much faster than they earn.[7] Moreover, saving was said to sharply accelerate while the economy slowed--as to be expected--yet retail sales still hardly slipped at all. In this light, it is difficult to credit rapid consumption gains.

Knockout Blow from Power

The Chinese economy's last serious slump was during the Asian financial crisis. It is now widely accepted that official GDP growth for 1998 and perhaps 1999 was heavily exaggerated. Evidence was first found in power consumption growth, which dropped like a stone in the late 1990s while GDP growth merely moderated. Last year was 1998 all over again.

An Official Discrepancy (percent change)[8]

Year

GDP Growth

Power Consumption Growth

2003

10.0

15.4

2004

10.1

14.9

2005

9.9

13.5

2006

11.1

14.0

2007

13.0

14.8

2008

9.0

5.2

The present boom started in 2003. The speed of GDP growth has been catching up to power consumption growth since then. Nonetheless, GDP growth has been below power consumption growth all through the boom, even with the large upward revision in 2007 GDP. In 2008, though, as the economy came under duress, GDP was suddenly much faster than power consumption.[9] The fourth quarter was far starker: GDP growth was said to hold 6.8 percent even while power demand contracted an (unweighted) 6.7 percent.[10]

Electricity consumption cannot be magically slashed from year to year, much less quarter to quarter. If it could, China's excessive coal use would long since have been resolved. Based on power consumption, a reasonable figure for 2008 annual growth is 6 percent with very little growth in the fourth quarter.

Rescuing Official Numbers, Partly

Is there anything useful to be gleaned from official statistics? A simple way to extract some value is to consider them one quarter ahead. In a difficult data-gathering environment, China presses statistics personnel to reach remote areas and adjudicate regional boasts in just three weeks after a quarter ends. Most likely, survey information gathered ostensibly for the quarter in question more accurately reflects the previous quarter.

This would explain much. One quarter's worth of 6.8 percent growth should not have caused six million migrants to lose their jobs already or pushed urban unemployment to 9.4 percent by the end of November.[11] But if growth had already fallen to 6.8 percent in the third quarter then, considering power consumption and imports, fell toward zero in the fourth quarter, the spike in unemployment is sensible. So is the increasingly frantic response of Chinese policy-makers starting in October.

This analysis only goes so far. Official growth for the first quarter of 2009 may better reflect the fourth quarter of 2008, but the Party will never acknowledge it as close to zero. More tea leaves will need to be read three months from now. Nonetheless, a reasonable profile of 2008 growth stands at roughly 10 percent in the first quarter, 9 percent in the second, 7 percent in the third, and 1 percent in the fourth.

The world is going to hear endlessly that, while China is slowing, it is still the fastest-growing economy and other countries would do well to learn from its example. It is closer to the truth that China has suffered more from the financial crisis than any other country in terms of lost growth and jobs.

Among other things, China's economic difficulties have implications for Sino-American trade relations and the Strategic Economic Dialogue (SED), now under review by the new American Administration. Our nation needs a mechanism like the SED, but the U.S. needs to focus it on what are now the most salient parts of the economic relationship, such as Chinese energy price liberalization and access to sheltered industries for foreign companies. Official statistics notwithstanding, China is not a crisis-resistant model of growth and prosperity. The true picture demonstrates continued scope for dialogue grounded in free market principles.

Derek Scissors, Ph.D., is Research Fellow in Asia Economic Policy in the Asian Studies Center at the Heritage Foundation.

China’s National Bureau of Statistics on Thursday released preliminary gross domestic product (GDP) figures for 2008. According to the report, the country’s economy expanded by 6.8 percent in the fourth quarter of 2008, compared to the same quarter a year earlier. This marks a further drop from the 10.6 percent growth year-on-year in the first quarter, 10.1 percent in the second quarter and 9.0 percent in the third quarter. For the whole of 2008, China’s GDP grew just 9 percent — marking the first time annual growth has fallen into the single digits since 2003, and the lowest annual GDP figure since 2001. Moreover, China’s 2007 GDP growth rate was recently revised to 13 percent, the highest in more than a decade.

China needs high growth rates much more than other countries do. The legitimacy of the government is derived primarily from its ability to stimulate and maintain economic growth, which in China is synonymous with employment. Should that fail, the Chinese people tend to take issue with their leaders, as evidenced by the repetition of social revolutions in Chinese history.

Many Chinese policymakers use 8 percent GDP growth as a rule-of-thumb measure for basic stability — the level needed to absorb the roughly 2 million new workers who enter the labor pool every year. Chinese leaders believe this is the level of growth needed to keep social pressures from exploding. So long as everyone has a job, Beijing does not worry overmuch about details like financial efficiency, profitability or transparency.

The same goes for accuracy, and Stratfor tends not to trust Chinese statistics. The regional data that local officials generate is not particularly reliable; stories abound about instances of padding data to make local statistics more impressive. This flawed data is then fed into the national statistics.

Chinese leaders in the late 1990s — particularly then-Premier Zhu Rongji — recognized that China’s economic statistics collection methods were fundamentally flawed. Leaders did not have a true picture of the Chinese economy, leaving them unable to manage growth and economic stability effectively. An effort began in 2000 to use statistical methods recommended by the Organization for Economic Cooperation and Development — but even with a good-faith effort, getting everything straightened out in less than a decade would be (and has proven) nearly impossible.

The Chinese economy is rapidly evolving from an overpopulated, agrarian subsistence economy to a hybridized industrial economy complete with large populations of roving migrants. The type of data that needs to be collected amid such a transformation changes more rapidly than new collection systems can be developed. In such an environment, collecting the right types of information accurately is, at best, a Herculean task, and each change in the process results in massive adjustments to previous estimates.

The severe downturn in the Chinese growth rates — admitted by a country known for massaging numbers — suggests things may be far worse than the headline 6.8 percent figure. Indeed, Stratfor sources peppered throughout China’s electronics, textiles, retail, energy, aviation and manufacturing sectors are painting a sobering picture. Exports to established markets are failing, foreign investors are desperate to find non-Chinese alternatives, protests by unemployed and underemployed workers are being reported by the state-controlled media. In general, the country is under severe stress from top to bottom.

The last time major contractions in China’s growth came in 2001 and 2003, and in those cases, Beijing simply reverted to its tried-and-true methods of subsidization of exports and a focus on gross revenues over profits. In recent years, the Chinese leadership has sought to reshape at least parts of the economic structure — using high growth rates as a way to compensate for the social and financial impact of industrial consolidation, increased labor costs and an attempt to push its exports up the value chain — while also seeking to boost domestic consumption as a component of economic activity.

But with the global economic downturn, China is losing export markets. It is holding onto significantly devalued stockpiles of primary commodities and primary products (such as steel) that were bought and manufactured during a commodity boom. It is slowing imports from regional partners — whose resulting drop in revenues will in return dry up much of China’s incoming foreign investment, another key component of economic growth and job formation.

China’s leadership is facing compounding problems and scrambling — desperately — for solutions. Compared to previous crises, they are off the map.

January 27, 2009The U.S.–China Economic Relationship: In Need of Counseling, Not Divorceby Derek Scissors, Ph.D.WebMemo #2249The process of demonizing the U.S.-China economic relationship has begun. It is being called out both as principally responsible for our nation's economic turmoil and as driven largely by devastating Chinese policies. There is certainly bad Chinese policy to be found. The yuan is misaligned and, more important, the People's Republic of China's (PRC's) tight controls on capital movement caused global economic adjustment to be more violent than it should have been.

Unfortunately, bad American economic policy made a proportionally greater contribution to this crisis. It is vital to recall that America's economy is much bigger than China's. The U.S. is the heart of the global economy. Moreover, there are many core benefits of the Sino-American economic relationship, benefits now being recognized even by some of China's harshest critics. On the U.S. side, these benefits include cheaper goods and still-cheap capital, simultaneously, a rare and valuable combination.

Blaming China First

For his congressional confirmation hearings, Treasury Secretary-designate Timothy Geithner submitted written testimony indicating that President Obama considers China to be manipulating its currency.[1] This testimony should be considered the first shot in a trade battle that has been looming since the start of the current economic crisis.[2]

Geithner's comments immediately sparked a debate over the role of Chinese policy in U.S. economic performance, with assessments ranging from principal blame for the PRC to no blame at all for the PRC.[3] One of the reasons for the sharp divergence in views is the availability of easy targets when attacking Chinese economic policy.

From the end of 2004 to the end of 2008, the yuan climbed more than 17 percent against the dollar and more than 14 percent against the euro.[4] In the same period, however, China's overall trade surplus went from $32 billion to $295 billion, an increase of more than 800 percent.[5] The currency movement has been insufficient.[6]

Another source of confusion is the, sometimes belated, recognition that the U.S. gains even from bad Chinese policy. One reason for the dangerous explosion in easy credit in the U.S. was the Chinese buying American bonds with proceeds from their massive trade surplus. This recycling was forced ultimately by the PRC's capital controls, whereby the foreign currency earned from exports cannot be freely used within China. Such currency can only be spent abroad and American bonds are the only market that can absorb $250 billion or more each year.

The closed-capital account has been trumpeted for years in Beijing as a great contributor to stability. As with all state attempts to control the market, it merely postponed the day of reckoning. Rather than addressing the ongoing minor instability of free capital movement across its borders, the closed-capital account and forced recycling contributed to the biggest patch of instability for the PRC since Tiananmen Square.

But Chinese politicians are not the only ones caught on their own hook. The principal advocates of trade action against China may have just recognized that the trade deficit the U.S. runs finances Chinese purchases of American bonds. Consequently, such purchases may now appear indispensable in light of plans to greatly expand the U.S. budget deficit.[7]

Contradictions

There is rhetorical and policy inconsistency on both sides of the Pacific because assigning blame runs headlong into the fact the U.S. and China both want to enjoy the benefits of their irresponsibility.

The inadequate American savings the PRC has harped on for years effectively sustained millions of Chinese jobs--jobs Beijing is desperate to keep.[8] In fact, despite its massive 2008 trade surplus, China is looking to boost exports further, relying on foreign consumption for still more help.[9]

On the U.S. side, Chinese purchases of American bonds will support the "pump-priming" designed by the Obama Administration. But American gains from the relationship go beyond that. Chinese exports to the U.S. are led by consumer electronics--computers, phones, and televisions. Clothing and textiles are the other major component.[10] Competition and products from the PRC have yielded lower prices and higher quality for American consumers, developments that are welcome when times are good and more urgent now that household income is stagnant or dropping.

It is a mistake, though, to translate these gains for the U.S. into a belief that China has disproportionate influence over the American economy. In 2007, the PRC's exports to the U.S. were equivalent to 2.3 percent of American GDP; they were 9.1 percent of Chinese GDP.[11] China's holdings stood at 5.3 percent of U.S. public debt securities on the most recent measure and much less than that when private debt is included.[12]

Just as important is the nature of the bilateral economic relationship. Fannie Mae and Freddie Mac do not sell debt to finance U.S. government intervention in the housing market; China cannot buy that debt, no matter how many dollars Beijing holds. The same is true of the bonds sold to finance U.S. federal deficit. If Americans choose not to buy as many goods, the PRC cannot sell as many, no matter how high production goes. There are plenty of substitutes for Chinese goods and capital, even if, at higher prices, there is no substitute for the American bond market and consumer.

The U.S. has benefited from Chinese over-saving, and China, from American under-saving. Poor policies on both sides of the Pacific led to excess and the current crisis. But it is inaccurate and potentially dangerous to lay most of this at the feet of the Chinese. Yes, the PRC shares blame for the global imbalance that is now unwinding. Given the size and centrality of the American economy, the problem and the solution start in the U.S. To determine otherwise is to trust, mistakenly, our nation's economic fate to others and risk a trade war in the bargain.

Derek Scissors, Ph.D., is Research Fellow in Asia Economic Policy in the Asian Studies Center at the Heritage Foundation.

[6]This is not the same as manipulation. As with so many of its policies, China's currency policy is dictated by obsession with stability. A relatively minor shift in July 2005 aside, the yuan has not changed since the 1994 devaluation. The stability obsession was very useful to the U.S. during the Asian financial crisis. What has changed since then is primarily U.S. goals for Chinese currency policy, not the policy itself.

[11]Eugene P. Sesky and Shelly Smith, "Annual Revision of the National Income and Product Accounts," U.S. Department of Commerce, Bureau of Economic Analysis, August 2008, at http://www.bea.gov/scb/pdf/2008/08%20August/0808_nipa_annrev.pdf (January 26, 2009); and

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: "President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency". In the US, the words "currency manipulation" are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government. The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

Under the Omnibus Trade and Competitiveness Act of 1988, "The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade."

"If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage."Should the US Treasury officially determine China to be a currency manipulator, the US Administration can unleash a range of remedies, including antidumping measures, countervailing duties, and safeguards. Although the World Trade Organization permits certain retaliatory responses from importing nations which can prove that they suffered material injury due to unfair trade practices, much of what the US Congress and some members of the Obama administration have in mind is likely to be in clear violation of the United States' WTO obligations. It would certainly provoke a response from China. The bilateral trade war that is likely to result could easily spread to the EU, Japan and emerging markets outside China.

Overall and bilateral current account imbalances and nominal and real, bilateral and effective exchange rates

The overall current account deficit of the US is the excess of US domestic investment over US national saving. The overall current account surplus of China is the excess of China's national saving over China's domestic investment. Bilateral trade balances are of no economic interest, unless there are only two countries in the world. Note that the first quote from the Omnibus Trade and Competitiveness Act of 1988 slides seamlessly from overall current account imbalances to bilateral trade imbalances, ignoring the transfer payments and foreign investment income items that are included in the current account but not in the trade balance. Trade balances and current account balances (bilateral or aggregate) can and do move in opposite directions.

There is no reason in economic theory or empirical fact why there should be any reliable correlation, between nominal exchange rates (bilateral or trade-weighted (effective) ) and the bilateral or aggregage trade balance, let alone a clear causal connection from any nominal exchange rate to the trade balance. Certain kinds of shocks and policy actions may produce an empirical association (not a causal relation) between a depreciation of the effective (trade-weighted) real exchange rate and an increase in the aggregate trade surplus. This is the case, for instance, for most aggregate demand shocks, e.g those produced by contractionary Keynesian fiscal policies. But supply shocks may produce the opposite correlation, that is, a depreciation of the effective real exchange rate and a reduction in the aggregate trade balance surplus.

In any case, as Chart 1 below shows, there has been a steady appreciation of the real effective exchange rate of the Yuan since the beginning of 2005. JP Morgan's broad real effective exchange rate index for the Yuan shows a 27 percent real appreciation since December 2004. The from a macroeconomic perspective uninteresting nominal bilateral US$-Yuan exchange rate appreciated 21 percent over the same period.

In mid-January 2009, a week before Chinese New Year, the Politburo of the Central Committee of the Chinese Communist Party held a meeting to discuss its plan for foreign propaganda work in the year to come. It summarized the past decade's progress in co-opting international Chinese-language media into doing the propaganda work of the Chinese Communist Party.

The Politburo decided that in addition to continuing its Chinese-language international image promotion, it plans to infiltrate and influence mainstream Western media. The meeting cited the example of the Russian former KGB officer and present tycoon who has purchase the defunct British newspaper The Evening Standard. This overt an approach is undesirable, the meeting concluded, and instead influential overseas Chinese in the media business should be utilized to purchase and operate mainstream Western media organs.

The spring 2008 coverage of the uprising in Tibet by CNN and other Western mainstream media organs sounded an alarm. China's Politburo concluded that it must counter this by infiltrating and influencing Western coverage of China and China's image in the international media.

The opportunity is presently ripe because of the downturn in the world economy. Many media organizations are in economic difficulty, even going bankrupt, and they can be purchased and it will look like an investment and business opportunity and not the attempt of the Chinese government to infiltrate Western media organs and influence Western popular opinion toward China that it is.

March 9, 2009 --WASHINGTON - Five Chinese vessels "shadowed and aggressively maneuvered'' towards a US Navy ship in the South China Sea -- at one point closing to within 25 feet of the boat, the Pentagon said today.

The US ship was operated by a civilian crew under contract with the Defense Department.

The Chinese vessels "shadowed and aggressively maneuvered in dangerously close proximity" to the USS Impeccable, which was conducting routine operations Sunday in international waters, the Defense Department said.

The Defense Department identified the Chinese vessels as a Navy intelligence ship, a bureau of maritime fisheries patrol vessel, a state oceanographic administration boat and two other small patrol vessels.

Two Chinese vessels surrounded the Impeccable, while two closed to within 50 feet waving Chinese flags and telling the US Navy ship to leave at once. The Navy ship responded by spraying one of the vessels with its fire hoses, but the Chinese ship responded by closing in further to within 25 feet.

US officials said the Impeccable informed the Chinese ships by radio that it was leaving the area and requested a safe path to navigate. That's when two of the Chinese vessels stopped directly in front of the American ship and dropped pieces of wood in its path, according to the Defense Department.

The US ship was eventually allowed to leave.

"We will be certainly letting the Chinese officials know of our displeasure with respect to this careless and reckless, unprofessional ... maneuver," said Pentagon spokesman Bryan Whitman.

U.S. officials said a protest was to be delivered to Beijing's military attache at a Pentagon meeting today.

"The unprofessional maneuvers by Chinese vessels violated the requirement under international law to operate with due regard for the rights and safety of other lawful users of the ocean," said Marine Maj. Stewart Upton, a Pentagon spokesman.

The incident came just a week after China and the U.S. resumed military-to-military consultations following a five-month suspension over American arms sales to Taiwan.

It also comes as Chinese Foreign Minister Yang Jiechi is due in Washington this week to meet with U.S. officials.

And it brings to mind the first foreign policy crisis that former President George Bush suffered with Beijing shortly after he took office - China's forced landing of a spy plane and seizure of the crew in April of 2001.

The Pentagon said the incident came after several other incidents involving the Impeccable and another U.S. vessel Wednesday, Thursday and Saturday.

It described those as the following:

- On Wednesday, a Chinese Bureau of Fisheries Patrol vessel used a high-intensity spotlight to illuminate the entire length of the ocean surveillance ship USNS Victorious several times as it was operating in the Yellow Sea, about 125 nautical miles (231 kilometers) from China's coast, the Pentagon said, adding that the Chinese ship Victorious' bow at a range of about 1400 yards (1,280 meters) in darkness without notice or warning. The next day, a Chinese Y-12 maritime surveillance aircraft conducted 12 fly-bys of Victorious at an altitude of about 400 feet and a range of 500 yards. (457 meters)

- On Thursday, a Chinese frigate approached USNS Impeccable without warning and crossed its bow at a range of approximately 100 yards (91 meters), the Pentagon said. This was followed less than two hours later by a Chinese Y-12 aircraft conducting 11 fly-bys of Impeccable at an altitude of 600 feet (183 meters) and a range from 100-300 feet. The frigate then crossed Impeccable's bow yet again, this time at a range of approximately 400-500 yards (366 meters-457 meters) without rendering courtesy or notice of her intentions.

- On Saturday, a Chinese intelligence collection ship challenged USNS Impeccable over bridge-to-bridge radio, calling her operations illegal and directing Impeccable to leave the area or "suffer the consequences."

BEIJING, Feb. 22 -- Secretary of State Hillary Rodham Clinton on Sunday urged China to keep investing its substantial foreign-exchange reserves in U.S. Treasury securities, arguing that "we are truly going to rise or fall together."

China is the biggest foreign holder of U.S. debt, which helped finance the spending binge the United States went on before the current economic crisis. Some experts have expressed concern that China's substantial holding of U.S. debt gives it increased leverage in dealings with Washington because any halt in Chinese purchases would make it more difficult to finance the government bailout and stimulus packages.

Clinton, in unusually direct comments during an interview with China's Dragon TV before returning to Washington, said that reality made it an imperative for China to keep purchasing U.S. Treasury bonds, because otherwise the U.S. economy would not recover and China would suffer as well.

"Our economies are so intertwined," she said. "The Chinese know that in order to start exporting again to its biggest market . . . the United States has to take some drastic measures with the stimulus package. We have to incur more debt."

"The Chinese are recognizing our interconnection," Clinton added. "We are truly going to rise or fall together. By continuing to support American Treasury instruments, the Chinese are recognizing" that interconnection.

At a joint news conference with Clinton on Saturday, Foreign Minister Yang Jiechi sidestepped a question about whether China was looking for alternative investments for its foreign exchange reserves. He said China looks for safety, good value and liquidity for its investments.

BEIJING, March 7 (Xinhua) -- China should speed up reforming its financial system to make the yuan an international currency, said political advisors Saturday.

"A significant inspiration to draw from the global financial crisis is that we must play an active role in the reconstruction of the international financial order," said Peter Kwong Ching Woo, chairman of the Hong Kong-based Wharf (Holdings) Limited.

The key to financial reform is to make the yuan an international currency, said Woo in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body. That means using the Chinese currency to settle international trade payments, allowing the yuan freely convertible on the capital account and making it an international reserve currency, he said.

China's yuan, or Renminbi, can be freely convertible on the current account but not on the capital account, preventing it from being a reserve currency or a choice in international trade settlement. China has announced trial programs to settle trade in the yuan, a move analysts say will facilitate foreign trade as Chinese exporters might face losses if they continue to be paid in the U.S. dollar. The dollar's exchange rate has become more volatile since the global financial crisis. Economists say the move will increase the acceptance of the currency in Asia, which will help it become an international currency in the long run.

The status of the yuan as an international currency will benefit China by giving it a bigger say in world financial issues and reducing the reliance of its huge foreign reserves on the U.S. dollar, some analysts say.

Other analysts argue a fully convertible yuan will hurt China as it would allow massive capital outflow during a financial crisis. Meanwhile, Chinese authorities remain cautious.

It's possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there's no need to push for that, Yi Gang, vice central bank governor, told Xinhua earlier this month. That process should be conducive to all sides, he said.

Xu Shanda, former vice director of the State Administration of Taxation and a CPPCC National Committee member, urged for faster paces in making the yuan an international currency as a way of increasing national wealth. He said the United States and the European Union have obtained hefty royalties from the international use of their currencies while China has become the biggest source of that income.

A royalty, or seignior age, results from the difference between the cost of printing currency and the face value of the money. "China's loss due to royalty payment has far exceeded the benefit of not making the yuan an international currency," he said in a speech to the annual session of the CPPCC National Committee, without elaborating. China's State Council, or Cabinet, said last December it would allow the yuan to be used for settlement between the country's two economic powerhouses -- Guangdong Province and the Yangtze River Delta -- and the special administrative regions of Hong Kong and Macao. Meanwhile, exporters in Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.

The United States and the People’s Republic of China resumed military-to-military talks February 27-28 in Beijing. The tone of the Defense Policy Coordination Talks (DPCT) showed the same American desire to accommodate China’s rise to peer power status that was shown a week earlier by Secretary of State Hillary Clinton’s trip to the Chinese capital.

Deputy Assistant Secretary of Defense David Sedney, a hold over from the Bush Administration, led the U.S. delegation that included officials from the Defense Department, the State Department, the Pacific Command and the Joint Chiefs of Staff. Among the Chinese participants were mid-level officers from the People’s Liberation Army, navy and air force as well as some civilians termed “military scholars.” Sedney held 13 hours of talks on Feb. 27 with a delegation led by Maj. Gen. Qian Lihua, the Chinese Defense Ministry's head of foreign affairs. A shorter meeting took place the next morning with Lt. Gen. Ma Xiaotian, deputy chief of the General Staff for the PLA.

This was the fifth meeting of the DPTT since its inception in 2005. China had suspended most military contacts last October over Washington's agreement to sell $6.5 billion in advanced weaponry to Taiwan, the self-governing island democracy that the mainland Communist regime claims is a renegade province. When Sedney journeyed to Beijing last December to ask that the DPCT meetings resume, he was turned down. China’s leaders were clearly waiting for the Obama Administration to take office.

Beijing took a hard line towards the talks. China’s state-run news agency Xinhua quoted Maj. Gen. Qian as saying that contacts would remain tenuous unless the U.S. removes remaining obstacles to improvement. “China-U.S. military relations still stay at a difficult period. We expect the U.S. side to take concrete measures for the resumption and development of our military ties,” said Qian.

The Obama administration seems in the mood to make concessions. After the DPCT meeting, Sedney told a news conference, “The focus was not at all on obstacles. The focus was on how we can move forward, how we can make progress, and how we can try to make joint efforts...to achieve common goals.” On major points, it was Beijing’s goals of expanding its influence in key regions that were advanced with American blessings.

Sedney thanked Beijing for hosting the Six Party Talks on North Korea, as had Secretary Clinton during her visit. Yet, two days before the DPCT, China had hosted a delegation from North Korea as part of the celebration of 2009 as the “Year of China-DPRK Friendship” marking 60 years of their alliance. Just as China sent the PLA to fight against the U.S.-led UN forces during the Korean War, China has used the Six Party Talks to diplomatically protect the Pyongyang regime from any concerted action that could endanger its rule. According to the official newspaper The People’s Daily, “Jia Qinglin, chairman of the National Committee of the Chinese People's Political Consultative Conference (CPPCC), told a delegation from the Workers' Party of Korea (WPK) that Sino-DPRK relations, fostered by leaders of older generations, had been continuously developed…but also looking into the future.”

Sedney praised China's contribution to the anti-piracy flotilla patrolling the Gulf of Aden off the Somali coast. Beijing sent two destroyers and a supply ship to the region in December. This naval deployment into the Indian Ocean marks a significant projection of Chinese influence towards East Africa where Beijing has been supporting the Sudan regime’s genocidal rule in exchange for control of its oil fields. The deployment also puts Chinese forces closer to the Persian Gulf and its ally Pakistan as tensions increase in Afghanistan and with India.

Sedney said he discussed possible Chinese contributions to non-military programs in Afghanistan. For what possible reason would the U.S. want to encourage any direct Chinese participation in Afghanistan? When the U.S. invaded Afghanistan, China was working with the Taliban regime building its infrastructure and an air-defense system.

The Taliban was the creation of Pakistan in an attempt to conquer Afghanistan so as to cover its western flank in its confrontation with India to the east. China supported its ally because of its own strategic rivalry with India. As the U.S. has tried to exert more pressure on Islamabad to take action against Taliban sanctuaries on its soil, Beijing has stepped up its diplomatic support for Pakistan, along with investment funds and arms.

President Barack Obama warned Islamabad that it would he held accountable for security along the Pakistan-Afghan border on February 10. The next day, Pakistan Foreign Minister Shah Mahmood Qureshi reaffirmed his country’s "all weather" alliance with China. Last October, newly elected Pakistan President Asif Ali Zardari made as his first foreign trip a pilgrimage to Beijing. Just before he left, he told a press conference, "China is the future of the world. A strong China means a strong Pakistan.”

In a February 23 editorial, The People’s Daily addressed U.S. strategy in Afghanistan, with a focus on improving Pakistan’s position against India. “It is clear that without Pakistan's cooperation, the US cannot win the war on terror. Therefore, to safeguard its own interests in the fight against terrorism in South Asia, the US must ensure a stable domestic and international environment for Pakistan and ease the tension between Pakistan and India.” This means supporting Pakistan’s position on Kashmir, the Indian province against which Pakistan-based terrorists have operated for decades. India-Pakistan tensions have been high since the November 26 terrorist attacks in Mumbai which killed 179 people.

Afghanistan's foreign minister Rangin Dadfar Spanta said on January 21 that India and Afghanistan were both victims of terrorism. “Afghanistan believes there are some entities in our region that are using terrorism as a tool for foreign policy. We have to end this. We share your pain, the pain of the Indian people because Afghanistan is the victim of same terror with same sources," Spanta said after a meeting with Indian Foreign Minister Pranab Mukherjee in Kabul.

China, of course, does not want the U.S. to take this view of the situation, as it would further what Beijing fears most; closer U.S.-Indian ties against a common threat from the Pakistani-Chinese alignment. The Chinese line is that Washington must support Pakistan against India in order to win Islamabad’s cooperation against the Taliban. This would isolate India, a primary goal of Chinese strategy.

The editorial declared, “the US must make sure that Russia is appeased. The Central Asia region, where Afghanistan lies, used to be Russia's backyard. Following the September 11 terrorist attacks, the US raised its anti-terrorism war banner to move deep into this region and revoked the color revolution in Kyrgyzstan. To Russia, all this feels just like a thorn in the flesh.” The editorial noted that Kyrgyzstan has expelled the U.S. from its Manas air base.

So, again, why would the Obama administration want China to become more involved in Afghanistan? Larry Wortzel, Vice-Chairman of the U.S.-China Economic and Security Review Commission, a bipartisan panel of experts created by Congress, asked Sedney this question at a hearing on March 4. Sedney’s response was that the U.S-NATO mission in Afghanistan is short on resources, and the Chinese could help by providing economic assistance and expanded trade. The Chinese model of trade would not help the Afghans, and any economic assistance would be used to buy influence with government and tribal elites that would undermine American objectives. Inviting China into Afghanistan is an act of desperation that has not been thought through.

The day after the Afghanistan editorial (and two days after Secretary Clinton left China), The People’s Daily ran another opinion piece entitled,” The U.S. Hegemony ends, the era of global multipolarity enters.” It started by reveling in the economic crisis that has swept America and “signals a swift reduction of U.S. strength as a unipolar power.” Its conclusion was stark. “Does the decline of U.S. geopolitical hegemony make multilateral global governance more likely? Perhaps it is still too early to rush any conclusion, but at least one thing is certain: the U.S. strength is declining at a speed so fantastic that it is far beyond anticipation. The U.S. is no longer 'King of the hill,' as a new phase of multipolar world power structure will come into being in 2009, and the international order will be correspondingly reshuffled.”

The opening hands played by the Obama administration with China would indicate that Washington agrees with Beijing’s assessment.

William Hawkins is a consultant on international economics and national security issues.

Obama administration defense officials said the incident Sunday followed several days of "increasingly aggressive" acts by Chinese ships in the region.

U.S. officials said a protest was to be delivered to Beijing's military attache at a Pentagon meeting Monday.

The USNS Impeccable sprayed one ship with water from fire hoses to force it away. Despite the force of the water, Chinese crew members stripped to their underwear and continued closing within 25 feet, the department said.

"On March 8, 2009, five Chinese vessels shadowed and aggressively maneuvered in dangerously close proximity to USNS Impeccable, in an apparent coordinated effort to harass the U.S. ocean surveillance ship while it was conducting routine operations in international waters," the Pentagon statement said.

The Chinese ships included a Chinese Navy intelligence collection ship, a Bureau of Maritime Fisheries Patrol Vessel, a State Oceanographic Administration patrol vessel, and two small Chinese-flagged trawlers, officials said.

"The Chinese vessels surrounded USNS Impeccable, two of them closing to within 50 feet, waving Chinese flags and telling Impeccable to leave the area," defense officials said in the statement.

"Because the vessels' intentions were not known, Impeccable sprayed its fire hoses at one of the vessels in order to protect itself," the Defense statement said. "The Chinese crew members disrobed to their underwear and continued closing to within 25 feet."

Emergency stop

Impeccable crew radioed to tell the Chinese ships that it was leaving the area and requested a safe path to navigate, the Pentagon said.

But shortly afterward, two of the Chinese ships stopped directly ahead of the Impeccable, forcing it to an emergency stop in order to avoid collision because the Chinese had dropped pieces of wood in the water directly in front of Impeccable's path, the Pentagon said.

Defense officials said the incident took place in international waters in the South China Sea, about 75 miles south of Hainan Island.

"The unprofessional maneuvers by Chinese vessels violated the requirement under international law to operate with due regard for the rights and safety of other lawful users of the ocean," said Marine Maj. Stewart Upton, a Pentagon spokesman.

"We expect Chinese ships to act responsibly and refrain from provocative activities that could lead to miscalculation or a collision at sea, endangering vessels and the lives of U.S. and Chinese mariners," Upton added.

Military-to-military consultations resumed

The incident came just a week after China and the U.S. resumed military-to-military consultations following a five-month suspension over American arms sales to Taiwan. It also comes as Chinese Foreign Minister Yang Jiechi is due in Washington this week to meet with U.S. officials. And it brings to mind the first foreign policy crisis that former President George Bush suffered with Beijing shortly after he took office — China's forced landing of a spy plane and seizure of the crew in April of 2001.

The Pentagon said the incident came after several other incidents involving the Impeccable and another U.S. vessel Wednesday, Thursday and Saturday.

It described those as the following:

On Wednesday, a Chinese Bureau of Fisheries Patrol vessel used a high-intensity spotlight to illuminate the entire length of the ocean surveillance ship USNS Victorious several times as it was operating in the Yellow Sea, about 125 nautical miles from China's coast, the Pentagon said, adding that the Chinese ship Victorious' bow at a range of about 1400 yards in darkness without notice or warning. The next day, a Chinese Y-12 maritime surveillance aircraft conducted 12 fly-bys of Victorious at an altitude of about 400 feet and a range of 500 yards.

On Thursday, a Chinese frigate approached USNS Impeccable without warning and crossed its bow at a range of approximately 100 yards, the Pentagon said. This was followed less than two hours later by a Chinese Y-12 aircraft conducting 11 fly-bys of Impeccable at an altitude of 600 feet and a range from 100-300 feet. The frigate then crossed Impeccable's bow yet again, this time at a range of approximately 400-500 yards without rendering courtesy or notice of her intentions.

On Saturday, a Chinese intelligence collection ship challenged USNS Impeccable over bridge-to-bridge radio, calling her operations illegal and directing Impeccable to leave the area or "suffer the consequences."

Military Sealift CommandThe USNS Impeccable (T-AGOS 23)SummaryChinese vessels appear to be acting with increasing aggression toward a pair of U.S. ocean surveillance ships in the Yellow and South China seas. Though such aggression is not unprecedented, it is a departure from China’s behavior of recent years, and it could indicate rising maritime tensions among many of the region’s naval powers.

AnalysisChinese sailing vessels have behaved with increasing aggression toward two U.S. ocean surveillance ships operating in the Yellow and South China seas. Though this recent behavior is not unprecedented, the U.S. 7th Fleet is characterizing it as a departure from normal interactions and the most aggressive behavior the fleet has seen from China in a long time. These aggressive moves might herald things to come as the maritime environment around China becomes increasingly active — and crowded.

Related Special Topic PageChina’s Military Related LinksSouth Korea: Changing Priorities in the Dokdo Dispute China: More Submarine Activity U.S.: Naval Dominance and the Importance of Oceans Amphibious Warships: The Real East Asian Arms Race China: Molding Perceptions of Military Prowess China: The Deceptive Logic for a Carrier Fleet On March 4, the USNS Victorious (T-AGOS 19) had an encounter at night with a Chinese Bureau of Fisheries patrol vessel in the Yellow Sea. The USNS Impeccable (T-AGOS 23) was approached more aggressively in the South China Sea the next day, when a Chinese People’s Liberation Army-Navy (PLAN) frigate reportedly crossed the Impeccable’s bow at a range of about 100 yards, and the Impeccable was buzzed nearly a dozen times at low altitude by a Y-12, a Chinese-made twin-engine turbo prop. Reportedly, the ship was threatened verbally over bridge-to-bridge radio on March 7 as well.

But it was the March 8 incident with the Impeccable that garnered the most attention. According to reports, a PLAN intelligence collection ship, a Bureau of Maritime Fisheries patrol vessel, a State Oceanographic Administration patrol vessel and two small Chinese-flagged trawlers were all involved in what the U.S. Navy has characterized as coordinated harassment of the Impeccable. Some of the ships were within 25 feet of the Impeccable at one point and stopped in front of the U.S. ship so close that the crew executed an emergency all stop to avoid a collision.

(click image to enlarge)The Impeccable is an ocean surveillance ship, part of the Military Sealift Command, and is operated by a mixed crew of civilian and military personnel. Capable of deploying towed acoustic arrays, the U.S. ship was operating within 75 miles of Hainan Island, where a number of sensitive PLAN and other military activities are conducted (reportedly including the deployment of the PLAN’s next-generation nuclear-powered attack and ballistic missile submarines). China would at least be concerned about the United States refining its knowledge of the submarine operating environment, and likely felt compelled to assume that the Impeccable was conducting other surveillance and intelligence-gathering activities.

This is not a new dynamic. It is the same basic dynamic that gave rise to the EP-3 Ares II incident in 2001, in which a Chinese aircraft collided with a U.S. signals intelligence aircraft, forcing the EP-3 to land at Hainan Island. Normally, these activities are routine, and both sides abide by internationally accepted or even unspoken sets of rules. But when one side chooses to escalate the situation, matters can quickly spiral out of control.

Part of this is simply a matter of increased PLAN activity, characteristic of a larger shift in how Beijing employs its navy. But with the PLAN’s 60th anniversary approaching in April (a formal announcement about its plans for an aircraft carrier fleet is anticipated), and the impending return of its first squadron deployed to the coast of Somalia, the Chinese navy is undoubtedly feeling rather confident and accomplished these days.

But internal tensions may also be at play. With the financial crisis in full swing, the PLAN may also be attempting to drum up incidents for budgetary purposes, to forestall major fiscal cuts to its accounts.

More importantly, the March 8 incident is emblematic of broader maritime tensions in the East Asian sphere — and not just between China and the United States. Over the past several months, tensions over long-standing maritime territorial disputes have once again risen across the region. North Korea has once again declared that it does not abide by the Northern Limit Line, the maritime extension of the Demilitarized Zone in the West/Yellow Sea, warning that a clash with South Korean naval vessels patrolling the area could occur. Japan, meanwhile, has launched a 10-year seabed mapping and underwater resource prospecting program, triggering warnings from Seoul and Beijing not to use the operations to lay claim to the disputed Tokdo/Takeshima and Senkaku/Daiyoutai islands respectively. And China’s competing claims over islands in the South China Sea are also resurfacing, provoking counterclaims from the Philippines, Malaysia and Vietnam.

In short, the waters around China are becoming more crowded and the mood increasingly contentious. The March 8 incident could herald increased volatility in the maritime environment — across the region — for years to come.

So once again we are reminded of why Ronald Reagan sank the Law of the Sea Treaty.

Thanks of a sort here go to China, which last week sent several ships to shadow and harass the USNS Impeccable, an unarmed U.S. Navy surveillance ship, as it was operating in international waters about 70 miles south of Hainan Island. The harassment culminated Sunday when the Chinese boats "maneuvered in dangerously close proximity" to the Impeccable, according to the Pentagon, forcing the American crew to turn fire hoses on the Chinese. Undeterred, two of the Chinese ships positioned themselves directly in front of the Impeccable after it had radioed its intention to leave and requested safe passage. A collision was barely averted.

The Chinese have a knack for welcoming incoming U.S. Administrations with these sorts of provocations. In April 2001, a hotdogging Chinese fighter pilot collided with a slow-moving U.S. Navy surveillance aircraft, forcing the American plane to make an emergency landing on Hainan, where its 24-member crew remained for 11 days. They were released only after the U.S. issued a letter saying it was "sorry" for the incident without quite apologizing for it.

Thereafter, the Chinese kept their distance from U.S. surveillance planes, and Beijing's relations with the Bush Administration were generally positive. But the Chinese military remains strategically committed to dominating the South China Sea, and it has recently built a large submarine base on Hainan. China also makes a contentious claim to the oil-rich Spratly and Parcel Islands -- an endless source of friction with the Philippines, Malaysia, Taiwan and Vietnam, which also have their claims. Following Sunday's incident, the Chinese accused the U.S. of violating Chinese and international law.

Which brings us to the U.N.'s Law of the Sea Treaty -- which the Gipper sent to the bottom of the ocean, but the Chinese have signed and which the Obama Administration intends to ratify, with the broad support of the U.S. Navy. The supposed virtue of the treaty is that it codifies the customary laws that have long guaranteed freedom of the seas and creates a legal framework for navigational rights.

The problem is that, as with any document that contains 320 articles and nine annexes, the treaty creates as many ambiguities as it resolves. In this case, the dispute involves the so-called "Exclusive Economic Zones," which give coastal states a patchwork of sovereign and jurisdictional rights over the economic resources of seas to a distance of 200 miles beyond their territorial waters.

Thus, the U.S. contends that the right of its ships to transit through or operate in the EEZs (and of planes to overfly them) is no different than their rights on the high seas, including intelligence gathering, and can point to various articles in the treaty that seem to say as much. But a number of signatories to the treaty, including Brazil, Malaysia, Pakistan and China, take the view that the treaty forbids military and intelligence-gathering work by foreign countries in an EEZ. Matters are further complicated by the claims China made for itself over its EEZ when it ratified the Law of the Sea in the 1990s.

We don't have a view on the legal niceties here, which amounts to a theological dispute in a religion to which we don't subscribe. But the incident with the Impeccable is another reminder that China's ambitions for regional dominance, and for diminishing U.S. influence, remain unchanged despite a new American Administration; and that the Law of the Sea Treaty, far from curbing ambitions or resolving differences, has served only to sharpen both.

Next time the Impeccable sails these waters -- and for the sake of responding to China's provocation it should be soon -- President Obama ought to dispatch a destroyer or two as escorts.

Saw this on another forum-- I have no idea as the the validity of the source, but find the question about the likely dramatic decline of Chinese exports and the domestic consequences thereof to be an interesting one.

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In this Global Guerrillas post John Robb talks about the effect a global depression might have on China.

I've included the comments as well.

Wednesday, 11 March 2009JOURNAL: Will China Survive a Depression? Don't bet on it...

The surge in China’s exports could prove to be as unsustainable as the rise in US (and some European) home prices. They might end up being mirror images … as Americans and Europeans could only import so much from China so long as they could borrow against rising home prices. Brad Setser, CFR blog.

China's exports cratered in February, a drop of 25.7%, in line with the drops in exports experienced by other mercantilist countries (Japan, Germany, Korea, and Taiwan). However, unlike those countries, China doesn't have an organic source of legitimacy except for its ability to deliver economic growth. As I have said earlier, the real threat from China isn't that is a potential peer competitor (a device used to sell big weapon systems), its that it could collapse:

So, what happens when China's high performance, globally connected capitalist economy which is flying at dangerously high speeds hits the inevitable speed bump? The answer is: it will derail (hollow out and fragment). The chaos it will produce in SE Asia is the real threat we have to deal with. Predicting the black swan that kicks off the death spiral is impossible, but as we have seen in other export-oriented Asian economies the shock will likely be economic. At that point, the dream of upward ascent and rising expectations, reinforced by global media, will be seen as a lie.

In anticipation of this, the Chinese government is following the lead of many other nations by radically improving the capabilities of its paramilitary force for domestic security (to the tune of one million men). However, this many not be enough. Global guerrilla theory indicates that the endemic corruption will combine with the same forces of anti-state guerrilla action we have seen in other places in an attempt to disconnect portions of China from the central government... (it will work).

Posted by John Robb on Wednesday, 11 March 2009 at 01:09 PM | PermalinkTrackBack

From The TimesMarch 12, 2009US warships head for South China Sea after standoffTim Reid in Washington

A potential conflict was brewing last night in the South China Sea after President Obama dispatched heavily armed American destroyers to the scene of a naval standoff between the US and China at the weekend.

Mr Obama’s decision to send an armed escort for US surveillance ships in the area follows the aggressive and co-ordinated manoeuvres of five Chinese boats on Sunday. They harassed and nearly collided with an unarmed American vessel.

Washington accused the Chinese ships of moving directly in front of the US Navy surveillance ship Impeccable, forcing its crew to take emergency action, and to deploy a high-pressure water hose to deter the Chinese ships. Formal protests were lodged with Beijing after the incident.

On a day that Mr Obama and his senior officials met the Chinese Foreign Minister, Yang Jiechi, in Washington, Beijing showed no sign of backing down. Its military chiefs accused the unarmed US Navy ship of being on a spying mission.

The US keeps a close eye on China’s arsenal, including its expanding fleet of submarines in the area. Washington says that the confrontation occurred in international waters, but Beijing claims nearly all the South China Sea as its own, putting it in conflict with five other nations that have claims over different parts of the waters.

The episode complicated fragile military relations between the US and China, which appeared to have improved after the two held defence talks in Beijing last month.

Mr Obama yesterday urged more military dialogue with China to avoid similar incidents after talks with Mr Yang, the White House said. “The President also stressed the importance of raising the level and frequency of military-to-military dialogue,” it said.

A hotline was established between the Chinese Defence Ministry and the Pentagon in April last year, but it was not used during or after Sunday’s standoff, defence officials said. The US Government immediately protested to Chinese authorities after the incident, about 75 miles south of Hainan Island.

Beijing has rejected the US account and demanded that the United States cease what it calls illegal activities in the South China Sea. The Chinese maintain the area is part of the country’s exclusive economic zone.

Washington insists that the area is part of international waters and that US ships have a legal right to operate there.

Crafty: "I find the question about the likely dramatic decline of Chinese exports and the domestic consequences thereof to be an interesting one."

I have long believed that the Chinese rulers would not survive a serous downturn in their economy, but I also have learned over time that I am more offended by the oppressive regime there than the Chinese people are. I don't know how an uprising would happen nor do I understand how such a small ruling class could contain a billion people over these years as they watched most of the globe move to consensual government. In any case, they haven't been tested with real economic troubles. The words of Rahm come to mind - you hate let a good crisis go to waste.

The leaders know to pre-empt upheaval by flexing their military strength and commitment. As they try to energize nationalism, maybe Obama is of some advantage in this situation. When they try to play the U.S. as the reason to pull together, maybe the evil, pre-emptive warmonger George W. Bush was a more convincing bogeyman for the masses than the affable, green behind the ears, can-we-talk, Barack. As they see the disarm, talk and surrender foreign policy of this administration it will be hard try to convince your people that your nation is under a serious threat from afar.

Geopolitical Diary: China's Calculated Currency RhetoricMarch 25, 2009One of the more popular conventional wisdoms is that the United States is in decline and that it is a simple matter to select options that will edge the United States out of its dominant position in the world. In an editorial published Tuesday, Chinese central bank governor Zhou Xiaochuan spoke to one of the more popular financial conspiracy theories in this vein when he wrote that the time had come to establish a new scrip to replace the U.S. dollar as the global reserve currency. The issue is close to Beijing’s heart: The Chinese reserve fund is a significant holder of U.S. debt, with some $750 billion in U.S. T-bills.

China does not purchase U.S. debt out of choice, but out of a lack of choice. China is a state with serious social stability issues that are mitigated only by state intervention in the economic structure to maintain mass employment. Since there isn’t much internal demand for the goods these employed masses produce — due in part to a high savings rate and low incomes — China must peddle its goods abroad. The U.S. consumer market, with annual sales of approximately $10 trillion, is roughly equivalent in bulk to the next six consumer markets combined. Sales to the United States and other countries hardwired into the American supply chain — which includes the bulk of East Asia — are the only reasonable option. And so the Chinese yuan has a de facto peg to the U.S. dollar.

That is hardly the extent to which the Chinese are bound to the dollar, however. Because China lacks the financial and industrial infrastructure needed to metabolize the massive revenues generated by exports, the income must be stored in some sort of non-Chinese asset. Outstanding U.S. T-bills currently total $11 trillion, which — with the notable exception of Japanese government debt, which very few foreigners even touch — is greater than the next five government debt issues combined, by a ratio of two to one. U.S. debt outsizes combined euro-denominated government debt by more than three to one.

Corporate debt isn’t much of an option either, even though the combined global corporate debt market is sufficiently large to absorb China’s currency reserves. Whenever an investor holds a substantial portion of any company’s debt, market liquidity is constrained and trading dynamics are altered. The solution is a highly diversified — and therefore actively managed — portfolio. But the administrative cost of a trillion-dollar portfolio so diversified that it does not affect the value of any particular asset would be staggering. In contrast, U.S. government debt is a one-stop shop that requires — at most — minimal management.

That China’s income is primarily in either dollars or dollar-linked currencies only strengthens the rationale for pouring surplus income into American assets in general, and U.S. government debt in particular. Plainly put, China cannot put its income anywhere else because there is no other option available. There have been some mild attempts to diversify, but a dearth of options means that “mild” is about as dynamic as a diversification program for China can get.

As to a world beyond the dollar, the issue is that a reserve currency is not decided upon; it creates itself. Two things are needed to create a reserve currency. First, there must be sufficient liquidity to support a global system. That requires a central bank with an enormous amount of autonomy from a state government, and the U.S. Federal Reserve is unparalleled on this count. Not even the European Central Bank can compete. Second, the economy upon which the currency is based must be large enough to withstand fluctuations caused by other economies buying and selling its assets in massive amounts. Again, the United States is the only economy that potentially could qualify.

Part and parcel of any replacement of the U.S. dollar would be a large-scale abandonment of U.S. T-bills as the core of Chinese currency reserves, which — as the conventional wisdom holds — would force intractable economic problems upon the United States. But a closer look reveals that this is not the case. First, selling U.S. T-bills en masse simply is not possible. Every seller requires a buyer, and the volumes at hand cannot be exchanged quickly. Second, starting down that road would cause the value of the securities in question to plummet, destroying the savings the Chinese have been building up for years. The so-called “nuclear option” really is not an option at all.

So why are the Chinese bringing this up in the first place? Beijing clearly has done the math already and knows that this idea — even if it had broad support — is a nonstarter. There are two reasons. First, officials in Beijing know that any direct confrontation — whether military or financial — with the United States would end in disaster for Chinese national interests. Therefore, they want to foster anything they can that would create an international structure to restrain American power; failing that, something that just gets people thinking in that direction will have to do. Second, China is more severely affected by the ongoing financial crisis than it would like the world to register. The Chinese need sustained international demand to maintain their export industries and, consequently, their high employment levels. Espousing rhetoric that makes it appear that you have more options than you do, while redirecting attention toward a foreign power, always plays well at home.

Christianity in China is booming. With 100 million believers, far more than the 74 million-member communist party, Jesus is a force to be reckoned with in the People’s Republic. We talk to the new faithful who love China – but love God moreJane MacartneyA murmur of “Amen” echoes softly down a corridor in a luxury Beijing hotel. Dozens of young Chinese are gathered in a beige-carpeted conference room to listen to the word of God. After helping themselves to hot water or tea at the back of the room, they find a seat and chatter with friends. They tuck Louis Vuitton and Prada handbags under their seats, switch their mobile phones to silent and turn to listen to a young woman who takes the microphone to ask for silence and recite a prayer.

A casually dressed, grey-haired Chinese man takes to the podium. “Let us begin with a look at the Gospel of Saint John.” There is a rustling of pages as converts and curious open their Bibles. Almost everyone in the room is scarcely a day over 30. Most look as if they are in their early twenties. They are fashionably dressed – girls with high-heeled boots, men sporting trendy knitted hats. This is Friday night Bible class in Beijing. And it is a weekend venue of choice for growing numbers of well-off middle-class city sophisticates.

The fact that this class is technically illegal, run by pastors lacking approval from the state-sanctioned Protestant church, is not the attraction. These are not young people seeking a frisson of excitement from some underground activity. They are at the forefront of a movement sweeping China – the search for spiritual satisfaction now that Marx is démodé.

No attempt is made to conceal what is, in effect, an underground religious gathering. A sign in Chinese outside the conference room reads: “Hill of Golgotha Church meeting”. A board outside the hotel lift directs visitors to Hall 5. There is not a nod towards secrecy or even discretion. There is no sense of anxiety, let alone fear, that officials could burst in to break up this illegal assembly even though police do still frequently raid house churches run by underground Protestant pastors.

A spectacular success

In fact, across China religion is undergoing a defiant and extraordinary revival. Millions of Chinese are turning to familiar traditional faiths such as Buddhism and Taoism – a mystical belief with about 400 million adherents that is China’s only indigenous creed. Taoist believers, like Buddhists, visit temples across the country to burn incense, present offerings and request readings from fortune tellers. Others are finding comfort in Confucius, but it is Christianity that is leading the battle for China’s 1.3 billion souls.

Many regard religion as a new force, unaware that missionaries – Protestant for the most part but also Roman Catholics – tried to spread Christianity across China in the 19th century and met with fierce opposition during the anti-Western Boxer Rebellion in the early 1900s. But it was former leader Deng Xiaoping, who effectively endorsed freedom of worship, and gave Christianity the chance to take hold, with his sweeping market reforms in 1978.

Today, two Christian faiths are allowed to operate within carefully prescribed limits: the Catholics, who must worship in churches run by the State’s Chinese Patriotic Catholic Association and number about six million, and the Protestants, who operate under the aegis of their government-sanctioned religious body, the Three-Self Patriotic Movement – standing for self-governing, self-teaching and self-supporting. Their numbers are estimated at 21 million – about the population of Australia. All other Christian associations are illegal.

Those who participate in non-sanctioned churches run the risk of police raids, a beating or even jail. The situation is more fraught for the underground Catholic churches than it is for the Protestant get-togethers. An unknown number of Catholic priests, and even bishops, languish in jail, serving lengthy prison terms for their temerity in preaching allegiance to Rome. Beijing’s Communist Party rulers are wary of an organisation that is so well organised and also headed by a leader – the Pope – who can command the loyalty of millions.

But that doesn’t seem to put off the growing congregations. Indeed, official numbers fall far short of the actual total. Recent surveys calculate the number of Christians worshipping independently of the State churches in China to be as high as 100 million. That means that almost one in every ten Chinese may now be a Christian, making Christianity bigger than the 74 million-member Communist Party.

Bring Christianity into the conversation and everyone seems to know someone who is a convert. I heard how many of the executive staff at one smallish Beijing hotel were keen Christians. A manager at an international bank mentioned that many of his employees shared a common faith.

Visiting an elderly woman who had been taken as a child to serve as a “comfort woman” to soldiers of the invading Japanese army in the Second World War, I was astonished to see a cross hanging on the wall of the simple home she shared with her son just across the road from the local Communist Party offices. Without embarrassment or fear, her son explained how each Sunday he attends services in a house church nearby. He proudly pulled out his hymnal and sang for me, while curious neighbours peered through the window.

I learnt of the Communist Party secretary of a village not far from Qufu, the home town of Confucius, who sleeps with a crucifix above his bed. His wife, he explained, was a Christian, as were his sons. Indeed, he went on, pretty much everyone in the village of about 3,000 was a believer. Almost all, it seems, belong to illegal house churches, small congregations that come together in private homes in cities, towns and villages across China.

Why Christianity has such a hold remains something of an enigma. Many Chinese are looking to fill the chasm left by the collapse in Marxist ideology’s credibility in the wake of the disastrous ultra-leftist 1966-76 Cultural Revolution and the Tiananmen Square crackdown. It’s also possible that a religion from the West holds a particular attraction for Chinese looking for a more modern faith to complement the stunning success of capitalist-style economic reforms. But the sense of belonging may be the best way to explain why Christianity has been such a spectacular success story in China in the past few years.

Finding a family far from home

Pastor Ezra Jin heads the Protestant Zion Church, based above a karaoke club in one of the thousands of faceless apartment blocks that populate the suburbs of Beijing.

He prefers not to see Zion as an illegal underground Church but rather as private and independent, and in the two years since its inception, the church has never suffered a police raid. “Our Church offers people a feeling of belonging to a family,” explains Pastor Jin. “There are more and more contradictions in our society as different interest groups emerge and gaps open up between regions and between social groups. Christianity can help by providing comfort and spiritual strength.”

Dressed in a sharply cut dark suit with a white shirt and gold silk tie, Pastor Jin could be just another successful executive. Instead he runs a house church so large he conducts at least three services every Sunday in a room brimming with 300 to 400 people. Toddlers play in a glassed-off crèche while their parents stand to sing hymns and to pray. A choir in hot-pink robes leads the singing and a little band with an electric organ and two guitar players keeps the congregation in tune.

Liu Huan has been playing the guitar in church for nine years. The slight computer engineer in his thirties beams with delight at being asked to explain why he attends a house church. Although in this case sprawling, neon-lit office might be more appropriate. Apart from the main hall, the Zion Church seems to occupy most of the floor of the building with smaller offices and store rooms. “My wife introduced me to God and coming here gives me strength.” He fits one of the models that Pastor Jin described: the out-of-town worker who has found a place in a new community far from home through Christianity.

With his spiky haircut and a single earring, Wang Ye cuts a dashing figure in the congregation. The 21-year-old is a student graduating in online business who hails from the northern coal-mining province of Shanxi. His mother, who had moved to Beijing in search of a better job and was lonely, found comfort when friends introduced her to the church. “She brought me as well. Many of us have family problems and we find warmth here.” He strolls over to join a group of friends gossiping about their plans to celebrate the Chinese New Year.

“The future of Christianity in China is very different from in the West,” believes Pastor Jin. “In the West, Christianity is in retreat, especially in Europe, but in China it is growing by leaps and bounds.” He cites the stability the church offers to a population buffeted by decades of wrenching political change as one of most appealing aspects of the faith.

The first hymn on a wintry Sunday at his Zion Church echoes that refrain. A lay preacher leads the congregation. Projected on a screen on the wall behind him the words scroll down against a background of plum blossoms. Voices are raised in song. “There are many things I don’t know in the future. But I know who will hold my hand and who will be in charge.”

As readings from the Bible and prayers follow more hymns, the atmosphere in the room is charged. A verse reaches a crescendo, women in the congregation one after another raise their arms above their heads and sway. One or two sob quietly. The lay preacher leads a prayer. Each time he mentions “Our Lord”, a chorus of “Amen” swells up from the crowd. Nothing is allowed to disturb their evangelical reverie and there is little sense among these worshippers that they risk arrest.

Pastor Jin believes the most difficult times for house churches such as his may soon be over. He recently took part in the first meeting between government officials and leaders of the banned underground Protestant faith.

It was the most significant step towards reconciliation in decades, and could mark a turning point in the Party’s attitudes.

“I wasn’t surprised,” he said. “It was clear to me that sooner or later God would bring us to this.” In addition, the size of the underground Protestant church has now reached such proportions that it is an increasing challenge for the authorities or the police to control. “China is a very big country so there will still be examples of persecution, but the overall direction is gradually changing.”

He says the talks could be a sign that the Communist authorities have come to recognise that the Protestant church at least can be a force for harmony – the watchword of the administration of President Hu Jintao, the current head of the Party. It was President Hu himself who told an unprecedented Politburo study session on religion in late 2007 that “the knowledge of religious people must be harnessed to build a prosperous society”.

“The Government is anxious to work out the way to go forward,” believes Pastor Jin. “They have understood that the Protestant Church is not an opposition force but a force for stability.”

A constant fugitive

But there are others who would disagree. Pastor Jin may operate in effect outside the law, but he is grudgingly tolerated. Arranging to meet him required little more than a couple of telephone calls. He chatted happily in public over a lunch of spicy Sichuan food in his local restaurant across an alley from the building housing his church.

Pastor Zhang Mingxuan falls into quite another category. Expelled from Beijing before the Olympic Games last August, he is persona non grata in the capital. He attracts police attention wherever he goes and his telephone is constantly tapped. On his first return visit to the capital since his eviction, he got off the overnight train from his home in central Henan province and met me behind a department store near the railway station.

A short, blockish man dressed in a shiny suit and with a tie embroidered with crosses, his first order of business was practical. “We’ve been on an overnight train and we’re hungry. Let’s have lunch.” No sooner had he sat down, intoned grace over the food and gulped down a glass of hot Coca-Cola to counter the bitter chill on one of the coldest days of the winter than he launched into an account of his confrontations with the police. Zhang, who describes himself as a lay pastor, heads what he calls the Chinese House Church Alliance, bringing together a number of diverse congregations. Any form of organisation is anathema to the ruling Communist Party, jealous of any rival power. Beyond the pale is a grouping of illegal underground churches that could challenge its supremacy.

It is small wonder then that he recounts a convoluted tale of eviction from his Beijing flat, from the homes of friends, suburban hotels, even from guesthouses in the province that abuts the capital. Everywhere he tries to lay his head, the police track him in their dozens, moving him out of their jurisdiction. Zhang is undeterred. “My head is here. Let them take it if they want it. But God is in Heaven and he won’t allow them to take my head.”

A poorly educated barber and the product of an atheist Communist system, he had little time for the Christianity in which his wife believed. Or at least that was until a business deal went wrong in 1986 and a failed court case left him deeply in debt. He heard his brother-in-law recite Psalm 38: “They also that seek after my life lay snares for me: and they that seek my hurt speak mischievous things, and imagine deceits all the day long.” The words cut to the heart. “I fell on my knees and in less than five minutes, I became a Christian.”

He was an enthusiastic convert. He does not hide his conviction that his mission now is to spread the word of God far and wide in China. His fervour contrasts with the measured tones of Pastor Jin. Leaping to his feet, he rolls up his trousers and points to scars on one leg. “Look! I was run over and I have two metal pins in my leg. But after 15 days I could walk again because of the Lord.” He spreads his arms wide and gestures to his stocky frame. “When they arrested me I fasted for 25 days. Nothing happened to me because God was with me.”

He does not bother to hide his contempt for the Communist Party. Fuelled with passion, his voice rises. “They hate me but I don’t hate them.” God, he says, is on his side and he will win. That passion must trigger anxiety among officials who for 30 years have guaranteed freedom of worship – but not worship conducted by unofficial ministers like Zhang.

The demolition three years ago of an illegally built Protestant church near the southern city of Hangzhou draws Zhang’s wrath. The building had been constructed on land intended for a commercial centre, and several hundred faithful in the town that is home to tens of thousands of Christians tried to stand in the way of the razing of the building. Secretly filmed video of the incident shows scuffles between worshippers defending their church and the police, with at least four people reportedly suffering broken bones as police wielding batons pushed back the crowd. Several were arrested and eight people were jailed for terms of up to three and a half years. For Zhang, such actions are evidence of the Communist Party’s fear.

“China is a land that has been chosen by God. If the government did not interfere then many more Chinese would become followers. Our hearts are thirsty.” Disturbed to learn that my Chinese colleague remains firmly atheist, Zhang leans forward across the table and tries to persuade her. “You should find faith as soon as possible so that we can all be brothers and sisters in God. God will save you. He makes so many miracles. He will protect you.” A day later, he was picked up by the Beijing police and shipped back to Henan province.

An understanding with the jailers Pastor Shen Quan was trained at an officially approved seminary – as was Pastor Jin – but he too left the government-sanctioned church in search of greater spiritual freedom. It has been more than two years since police last carried out a raid on one his services, during which members of his congregation were intimidated and warned not to attend, while he was taken away and questioned. He is not as optimistic as Pastor Jin that the recent inauguration of tentative talks between government and house church luminaries heralds an end to the persecution. “This is just not possible. As long as the house churches exist, the government must want to try to control them.”

But government raids on house churches have proved somewhat counterproductive. Underground Christians say that as soon as one house church is closed, its members split up and found their own small congregations, further multiplying the numbers.

One of the attractions of these churches is the personal care that a pastor gives to his flock, which is a world away from the more rigid approach of the state-sanctioned Three-Self Patriotic Church. One such – the Kuanjie Church – was full by 9am for a Saturday morning service. A far higher proportion of the congregation were middle-aged or elderly and one woman made it her duty to patrol the aisles making sure that everyone, including curious first-time visitors, fell to their knees on specially provided foam cushions during the lengthy prayers. Even in this church, the tone was evangelical. Two women with microphones on poles moved between the pews, ensuring worshippers had a chance to offer aloud their prayers and to share with the rest of the congregation their stories of individual communion with God.

But such official churches lack the personal touch found in the small house churches, and perhaps because of that are growing more slowly. The challenge now for the government is to determine how it will handle the breakneck spread of the underground churches.

Zhao Xiao is a prominent economist, a professor of the University of Science and Technology and a one-time Communist Party member. He is also a Christian and something of an optimist. He sees the recent groundbreaking talks between the two sides as inevitable. As the Christian population has grown, the Party has recognised that Protestants are making no attempt to form an alternative organisation and are not questioning the rule of the party, he says.

This may have given the leadership greater confidence to liaise with them. It is also common knowledge that huge numbers of the volunteers who raced to help with the aftermath of last year’s devastating earthquake in southwest China were Christians. Many are still there, helping the survivors and, sometimes, preaching.

Familiarity, Professor Zhao believes, is another important factor. “It has taken many years to reach this point. Many meetings have taken place over the years between imprisoned pastors and their police jailers and this has bred a closer understanding. Those changes in attitude meant this day could come.” He adds: “I think that one day the Communist Party will even allow Christians to become members.”

2009-04-22Comments by a Beijing professor enrage petitioners, who descend on his office and prompt a police crackdown.

Courtesy of a petitioner.Police in Beijing move in on petitioners in the capital in several locations during a sensitive anniversary year.HONG KONG—Authorities in Beijing have begun moving to clear large numbers of people from the capital who have a grievance against the government as security tightens, with local residents and petitioners reporting detentions in several sensitive locations.Hundreds of protesters have traveled from all over China to the capital's prestigious Beijing University following recently reported remarks about petitioners by a professor there.A number of these were rounded up in recent days, and their details recorded by police after they staged a sit-in in protest at recent comments by university professor Sun Dong Dong, who was reported as saying that 99 percent of long-term petitioners—people who try to lodge complaints about alleged official wrongdoing through official channels—were mentally ill.Sun has since said his comments, which have drawn widespread public anger and protests from China's thousands of long-term petitioners, were reported out of context by the media, while a health ministry official has said he was exercising his right to freedom of expression.On Saturday and Sunday the police were detaining a lot of petitioners..."Shenzhen petitionerA Beijing-based petitioner surnamed Li said she saw 83 petitioners who had traveled from Shanghai to protest against Sun's reported comments."According to the records of the Haidian branch police station, five of them had come back a second time after being removed," Li said.Detained outside universityLi said both she and petitioners Wang Shenfang and Zhu Jianping were detained for a total of seven days for causing a public disturbance.""We were then taken out of Majialou [detention center] by our hometown representatives in Beijing, who wanted to know the exact circumstances of our coming to Beijing University, and particularly whether anyone had got in touch to organize the protest," she said."They didn't send us back to Shanghai until the evening on the second day."Sun's comments are particularly sensitive for petitioners, who have been incarcerated in mental institutions and force-fed medication because they refuse to give up after decades of trying to win redress for official wrongdoing, which can include deaths in police custody, forced evictions, and alleged corruption.Comments 'out of context'In a telephone interview, Sun acknowledged his remarks but said media reports published his comments out of context."The original meaning of my comment was that, of the 'long-time' petitioners who came to me, the result [99 percent of them suffer from mental problems] was based on several tests. But when the comments came out, the media omitted the first part and only published the other part," Sun said."Of course I take responsibility for what I said. But the media deleted part of it and triggered this” response, he said."The petitioners’ emotions are running so high right now that it will only trigger more contradictions if I talk to them. I will explain [the situation] to them in due course," Sun said."I have dealt with great pressure from this incident. But from an objective point of view, it has caused us to learn and to care more about mental problems. This shows progress in society,” he said.Government officials have indicated publicly that they accept that the majority of petitioners have legitimate complaints. In practice, however, petitioners are routinely detained, beaten, and sent back to their hometowns if they try to present them in Beijing, especially during times of tightened security.Elsewhere in the capital, three petitioners, including two pregnant women and a cancer patient, were detained after they handed out leaflets in and around the Beijing official residence of Chinese Premier Wen Jiabao on Monday, witnesses said.Fliers at Premier's houseLi Chunxia and Zhao Chunhong, both pregnant, and cancer patient Li Shuzhen went to the Premier's house on Monday afternoon, and threw leaflets detailing their complaints against the government into the house, and into the alleyway outside it, according to a Beijing resident surnamed Chen, who saw them detained."This afternoon at about 3 p.m. three people were taken away in a police car," Chen said. "They were throwing fliers at No. 17, Dongjiao Alley. Some of the fliers went into the courtyard, while others landed outside the walls.""They were taken to the police station by police, national security police, and plainclothes officers. I didn't dare to shoot any video," Chen said.Police have stepped up their presence in the southern part of the city in recent days, especially targeting areas in the south of the city near the railway station and bus station, petitioners said."There are a lot of police vehicles," a petitioner from Shenzhen surnamed Zhao said from the southern Beijing district of Fengtai, temporary home to a large number of people seeking to make complaints against officials in their hometown.

"On Saturday and Sunday the police were detaining a lot of petitioners and taking them straight to Majialou," she said, referring to a holding center where petitioners are detained to await escort back to their respective hometowns.Raid on railway, bus stations"I was asking around the southern railway station today, and they told me they probably detained a couple of hundred people," she added."There were about 20 people detained in the morning," a petitioner from eastern Anhui province surnamed Wang said, referring to petitioners sleeping in the corridors of the long-distance bus station, not far from the southern railway station."Down by the railway station, while I was watching they took away a whole busload of people. That's probably 50 or 60 people," he said.A petitioner surnamed Li said the authorities were deliberating targeting petitioners who might try to travel to central Beijing to protest outside government buildings."I was detained at the police station for a day and night. They don't give you anything to eat," she said. "If it's after 12 p.m. they take you to Majialou, but they deliberately delay things so that you get there after lunchtime and there is nothing to eat."Authorities in Beijing are beginning to tighten security through the capital ahead of the 20th anniversary of massive pro-democracy protests, which ended in an armed crackdown on student-led protesters in and around Tiananmen Square.Hundreds, perhaps thousands, are believed to have died, but the government has ignored repeatedly calls for a reappraisal and public discussion of the incident.Original reporting in Mandarin by Qiao Long and Ding Xiao, and in Cantonese by Grace Kei Lai-see. Mandarin service director: Jennifer Chou. Cantonese service director: Shiny Li. Translated and written for the Web in English by Luisetta Mudie. Edited by Sarah Jackson-Han.

WASHINGTON – The Pentagon Tuesday played down a confrontation between Chinese vessels and one of its Navy surveillance ships, taking a decidedly more low-key tone than during similar incidents two months ago.In what has become almost a routine cat-and-mouse game on the seas, there have been four incidents in the past month in which Chinese-flagged fishing vessels maneuvered too close to two unarmed ships crewed by civilians and used by the Pentagon to do underwater surveillance and submarine hunting missions, two defense officials said. They spoke on condition of anonymity to discuss some of the incidents and details that the Pentagon has not yet released, adding that they fear such maneuvers are not just dangerous in themselves but could lead to escalated incidents.The Pentagon did release a brief statement on the latest confrontation in which two Chinese fishing vessels came dangerously close — to within 30 yards — of the USNS Victorious Friday as it was operating in the Yellow Sea.The Victorious crew sounded its alarm and shot water from its fire hoses to try to deter the vessels in an hour-long incident, one official said. The vessels didn't leave until the Victorious radioed a nearby Chinese military vessel for help, said Defense Department spokesman Bryan Whitman.After incidents in March that included similar though apparently more aggressive Chinese maneuvers, the Pentagon protested to Beijing officials and issued a strong public statement calling the Chinese actions harassment.But on Tuesday, Whitman declined to characterize what the Chinese vessels were trying to do, saying only that their actions were "unsafe and dangerous."Asked why the tone of the U.S. statement was muted this time, he said: "We will be developing a way forward to deal with this diplomatically.""USNS Victorious was conducting routine operations on Friday, May 1, in international waters in the Yellow Sea in accordance with customary international law, when two Chinese fishing vessels closed in on and maneuvered in close proximity to the Victorious," the Pentagon said in its statement. "The intentions of the Chinese fishing vessels were not known."It said the Victorious radioed the WAGOR 17 Chinese government ship, which came and shined a light on one of the fishing vessels. Both of the fishing vessels then moved away."WAGOR 17 took positive steps, pursuant to their obligation under Article 94 of the United Nations Convention of the Law of the Sea, to ensure their flagged vessels navigate safely," the statement said.Friday's incident followed others on Thursday, April 7 and April 8 in which Chinese-flagged fishing vessels approached too close to the Victorious and the USNS Loyal as they operated variously some 140 nautical miles, 185 miles and 200 miles off the coast of China, a defense official said privately.In the first week of March, the Chinese over several days maneuvered vessels near Navy surveillance ships and sent aircraft to fly over them. In a particularly aggressive incident March 8, the Pentagon said, several Chinese ships surrounded the USNS Impeccable, coming within 25 feet and strewing debris in its path.Those cases took place in a disputed band of water far off the Chinese coastline but within what Beijing considers a 200-mile economic zone under its control. The zone, under international law, gives a state certain rights over the use of natural resources there. That clashes with one of the cardinal principles of America's doctrine of ocean navigation — the right to unrestricted passage in international waters as long as vessels are not encroaching on the economic interests of the country they pass.Associated Press writer Anne Gearan contributed to this report.

China has chosen short-term responses to the global economic crisis. While these may buy Beijing time, they only delay — and possibly undermine — real structural change. And that could portend a bigger Chinese crisis in the coming years.

China registered 6.1 percent gross domestic product (GDP) growth for the first quarter of 2009, down from the 6.8 percent growth rate for the fourth quarter of 2008. While this may appear fairly robust compared to the 6.1 percent decline in GDP registered in the United States for the same quarter (a number that was a slight improvement over the 6.3 percent decline in the fourth quarter of 2008), comparing these numbers is not comparing apples to apples. The United States, along with many other countries, notes GDP changes from quarter to quarter (the Q1 number is in comparison to the preceding Q4), whereas China counts changes year on year (Q1 is in comparison to the previous Q1).

By some estimates, as measured comparable to the U.S. system of accounting, China’s economy sunk to zero growth in Q4 2008, or even went negative — and that decline continued into Q1 2009. But even looking just at the year-to-year numbers, Chinese economists have quietly admitted that at least 4 percentage points of their growth figure are attributable to government stimulus monies, and that economic growth was really in the 1 or 2 percent range, far below government targets. Other observers of Chinese statistics agree with the 4 or so percentage points attributable to stimulus, but also suggest that some 2 or 3 percentage points are also exaggerations reported up the chain from lower levels of the bureaucracy to avoid falling too short of central government expectations, meaning that growth again was at zero or negative in the first quarter.

Amid a global economic crisis, even zero percent growth is not all that bad. But it is a significant problem for the Chinese leadership, which has placed excessive importance on the specific growth numbers, in part due to concern that a flagging economy could stir social instability and in part due to Communist Party legitimacy being linked to economic growth these days.

Beijing’s response has been a reversion to the tried-and-true methods of:

supporting export industries, encouraging, via rewards or threats, the maintenance of employment levels by companies (even if this is unprofitable, contributes to overproduction, and delays or avoids the weeding out of the weak and inefficient in the Chinese economy), and large-scale state spending (directly from government coffers or indirectly through a loan surge from major state-backed banks) designed to boost infrastructure development and underwrite a rise in domestic consumption of large items like automobiles and major appliances. These measures may give Beijing some control over China’s looming unemployment problem, which is something officials fear but are still far behind in addressing, with social security and health care initiatives still largely in the formative stages, rather than well developed in preparation for the combination of a sustained economic slowdown and an aging population. But Beijing largely has stalled or reversed initiatives from the past several years that were designed to reform the economy into a less redundant, more efficient and flexible system better able to adapt to global change. In short, China’s short-term solutions to the global economic crisis are buying time, but they are delaying, if not undermining, real structural change. And that could portend a bigger Chinese crisis in the coming years.

The Chinese Bank Spending SpreeIn the first quarter of 2009, Chinese banks went on a massive state-mandated lending spree. The so-called big three — the Industrial and Commercial Bank of China (ICBC), the China Construction Bank (CCB) and the Bank of China (BOC) — issued some 4.58 trillion yuan ($670 billion) in new loans during that quarter. Much of this purportedly was issued for major infrastructure projects as part of the government’s $586 billion stimulus package, though anecdotal reports suggest much went to state-owned enterprises (SOEs). The SOEs may have used the loans for market speculation, paying off earlier loans or maintaining payroll during the economic downturn rather than spending capital improvements and efficiency programs.

The first-quarter loans accounted for more than 90 percent of the initial government yearly loan targets, prompting concerns that after the initial flood of loans, liquidity would dry up for the rest of the year. But Chinese officials have now said new loans will not stop at the 5 trillion yuan (about $732 billion) target, and it has been suggested that total lending may be closer to 8 trillion or 9 trillion yuan (about $1.1 trillion or $1.3 trillion) for the year, and initial estimates put April new lending at 400 billion to 600 billion yuan (about $58 billion to $87 billion).

While lending has helped Chinese companies maintain employment levels during the economic slowdown, it also brings about renewed risks to the Chinese banking sector and undermines earlier nascent moves to try to drive Chinese businesses to be more profitable and efficient rather than to rely on state bailouts and loans to stay afloat. As the big three were issuing record quantities of new loans in the first quarter, their net profits were falling; the CCB reported an 18.2 percent decline for the quarter, and the BOC reported a 14.1 percent decline. Only the ICBC reported a net growth in profits (of some 6.2 percent), but according to the bank, this was due to a significant hike in fees and a dip in operating costs.

For each of the big three, loan interest makes up by far the bulk of operating income (79.5 percent for the ICBC, 77.5 percent for the CCB and 73 percent for the BOC). And the banks are noting narrowing margins on loan interest as the cause for their net profit declines. It is also likely that hidden within these numbers is a growing problem of loan repayment, particularly given reports of thousands of companies that have been shutting their doors since the fourth quarter of 2008 or turning unprofitable in the current economic environment.

While the lending spree is designed to give the economy a boost and maintain a system flush with liquidity to avoid the U.S.-style economic crunch, it is also increasing the risks of nonperforming loans (NPLs). This risks weakening the banks, which already were bailed out more than a decade ago to the tune of some $325 billion in transfer of bad debt to asset management corporations, thus cleaning the banks’ balance sheets.

It also reduces the pressure on Chinese companies (particularly state-owned companies) to reform their business practices and become more efficient and profitable rather than rely on government loans and incentives to operate. In addition, with most loans targeting state firms, China’s private companies remain on the back burner. This is another reversal of earlier initiatives to push for a greater role for the private sector aimed at making the system more susceptible to market forces, and thus more likely to weed out inefficient and outdated companies.

Avoiding the Oversupply IssueOne issue the government keeps coming back to (and keeps running away from just as quickly) is the massive oversupply of production in certain sectors of the Chinese economy. Much of the Chinese economy is made up of redundant, small, inefficient production facilities, the remnants of the old Mao-era encouragement of self-sufficient provinces and cities. Many of these redundancies remain because while inefficient on a national scale, they still provide employment, tax revenues and economic output numbers for the provincial and local officials. Few are willing to see their local industries shuttered to satisfy a national need to become more streamlined and efficient for the long run.

The new pressures building on China’s banks could not come at a worse time. In the mid-1990s, the run-up of bad debt was beginning to cause significant problems for the Chinese financial sector, and a bailout program was launched in 1999. The government took mounds of bad loans from the Chinese state banks, transferring them to new firms called asset management corporations (AMCs). In exchange, the AMCs issued bonds worth the full face value of the NPLs back to the banks, despite the fact that the NPLs were worth — at most — one-third of that. In one wave of the accounting wand, the state banks went from being anchored down by dud assets to being flush with cash.

Those bonds provided a huge boost to the banks’ balance sheets, as they were backed by China’s central bank, the People’s Bank of China, and so were as good as cash when determining how healthy the institutions were. This made the Chinese banks rather attractive with their initial public offerings, gaining foreign investment and expertise and limiting competition in the Chinese banking sector as it opened due to World Trade Organization regulations.

But the NPLs were never disposed of. These AMCs were supposed to follow the model of previous “bad bank” programs, disposing of the bad debt by forcing indebted firms to pay up or — if push came to shove — liquidating the firms for whatever salvageable assets might be sold off to pay the debt. But closing firms down, obviously, would mean adding to the ranks of the unemployed. So the AMCs instead simply held the bad debt — for 10 years — while the state banks used their shiny new cash-equivalent bonds to issue even more loans.

As 2009 rolls on, this strategy is coming back to haunt the government. The NPL bonds are structured so that the AMCs only need to pay interest, not principle and interest as with normal bonds. With the bond rates at approximately 2 percent, this has been a barely manageable task. (Remember, the AMCs have been disposing of very few actual dud companies, so their income has been tiny, though supplemented by some good assets also transferred at the time of their creation.) But all of the bonds in question are 10-year bonds, with the entire value of the principle due around the end of the year. Because very few NPLs actually have been disposed of, and because NPLs generally are worth less than one-third of their face value, the only way these bonds could be redeemed would be if the Ministry of Finance doled out the cash itself. After all, the AMCs were designed to do little more than simply hold the loans, not actually rehabilitate them.

When the Chinese economy was growing at double-digit rates, the banks could stay ahead of the potential problem of NPLs. But with the economy effectively stalling at the same time banks are being asked to significantly increase the issuance of new loans, a major problem may be brewing. This means one of three things has to happen:

The banks will have to write off these bonds, seeing a massive drop in their balance sheets. The Ministry of Finance will have to step in and recapitalize. The bonds will be rolled over, pushing the problem further out in the hopes that it either simply goes away or that the Chinese economy will have grown enough by that time to simply absorb the losses. With the latter choice the most likely, and with the addition of some 5 trillion - 9 trillion yuan in new loans this year (with questionable performance on much of it), the Chinese are heading toward another future banking crisis. And the flight of foreign investors from Chinese banks certainly will not help this crisis.

In short, like many others, the Chinese are using short-term measures to deal with the current economic downturn. But these measures not only are building in renewed risks (like the compounding NPL problems), they also are reversing the small steps toward economic reform necessary for more stable and continued Chinese economic development. The government was able to boost domestic consumption in the first quarter of 2009, but this was primarily through coupons and incentives focused mainly on rural purchases of large appliances and automobiles. These are not sustainable efforts. Many Chinese economists have criticized the moves as building new dangers as rural consumers spend their meager savings on big-ticket items, leaving them with a car and refrigerator but no job or health insurance.

A Missed OpportunityThe surge in bank lending to Chinese companies, both for infrastructure projects and to cover old loans and payroll, also is not sustainable, particularly as bank profits fall, margins thin and the risk of a new surge in bad loans rises. And the strength of the Chinese economy remains undermined by allowing weak companies to be kept alive through loans and government incentives. The debate in Beijing is whether the financial crisis has offered China the opportunity to fundamentally make its economic system more profitable, efficient and able to adapt to changes in market forces, or whether the crisis is another moment when the government needs to do what it can to shore up the old system.

Beijing has chosen the latter path, which it deems less socially destabilizing, and thus greater government involvement in the economy will be expected. But the pent-up pressures on the Chinese economy, and on the Chinese leadership, are likely to be worse in the long run. And with the economy unlikely to return to double-digit growth anytime soon (if at all), the day of reckoning may come sooner rather than later.

"China registered 6.1 percent gross domestic product (GDP) growth for the first quarter of 2009, down from the 6.8 percent growth rate for the fourth quarter of 2008."

That's a bit hard to believe for an export-based economy with falling exports. Considering all the false economic statistics bandied around here in the U.S., makes me wonder how accurate theirs are. Strat goes on to question those numbers as well. Their analysis is excellent IMO.

The Chinese economy is less that one third of the US, with more than 4 times as many people to support. The people's acceptance of the government comes from a) coercion and b) a sense of security including economic. Not exactly positioned for large downturns or turmoil.

Some 10,000 people storm hospital, clash with police in China's Chongqing

618 ¦r2009 ¦~ 5 ¤ë 17 ¤é 00:32BBC Monitoring Asia Pacific^¤å(c) 2009 The British Broadcasting Corporation. All Rights Reserved. No material may be reproduced except with the express permission of The British Broadcasting Corporation. Text of report by Hong Kong Information Centre for Human Rights and Democracy on 14 May[Report: "Some 10,000 People Stormed a PLA Hospital for Refusing To Save a Dying Person and Clashed With Police, Resulting in 10 People Injured"]

According to information obtained by this centre, yesterday a retired soldier who had participated in the 12 May rescue task accidentally fell down from the fifth story of a building. He was sent to the PLA's No 324 Hospital in Chongqing for emergency treatment. But the hospital refused to give him emergency treatment because his relative did not bring enough money to pay the required expense. As a result, the 23-year-old retired solider died. This matter aroused popular indignation.Yesterday, some 10,000 people stormed No 324 Hospital and clashed with the riot police. Ten people were injured when the police were beating the masses. To prevent more serious clashes, armed and riot police, numbering several hundreds, stayed in the vicinity of the hospital today to take precautions.

As this centre has learned, the retired soldier was doing cleaning work on the fifth floor of a building when he lost his footing and fell down. He was first sent to Chongqing's Nanqiaosi Hospital and then transferred to the No 324 Hospital for emergency treatment. At that time, because his relative did not bring enough money to pay the 20,000-yuan emergency treatment expense, the Emergency Centre of No 324 Hospital refused to give him emergency treatment. Despite repeated requests made by the relative, saying that the injured was a demobilized and retired soldier, the hospital still refused to do anything. Two hours later, when the relative came back with enough money, the 23-year-old lad had died. Extremely enraged, his family members came out in the afternoon to protest at the door of the hospital, holding a picture showing this young soldier in uniform. This news quickly spread in Chongqing, triggering indignation among the residents. By 6 pm, when people were going home from their workplaces, thousands of people had gathered in Jianxin East Road to stage a protest, blocking the traffic. By 8 pm the number of protestors had reached 10,000 and was still growing. They carried a banner bearing words that criticized the government and tried to break into the hospital. The riot police seized the pictures of the dead held by his family and the masses as well as the protesting banner, and a clash between the masses and police ensued. Ten people were injured when the police were beating the masses. At 10 pm the masses began to leave, while the family of the dead were taken away by several mini-buses. Even today they could not make contact with other people. Presumably, they are under house arrest. In response to our inquiry, the Guanyinqiao Police Station confirmed this incident. A worker of Boai Hospital, which faces No 324 Hospital across the street, confirmed that last night's protest involved more than 10,000 people. According to a doctor of that hospital, the family of the dead told the supporting masses that last year this retired soldier had rushed to rescue victims of the 12 May earthquake at the risk of his own life.

No 324 Hospital is a unit of the Chengdu Military Region. It is open to the public as a designated medical facility in Chongqing Municipality. It is also an emergency treatment centre in Chongqing's Jiangbei District.

Investors appear to have little faith in company accountsCHINA’S stockmarket has been one of the best performing in the world this year, and the country’s firms have so far steered through the global financial crisis better than many of their global peers. Partly they may have been buoyed by robust business conditions in China. But two recent studies, which raise serious questions about the credibility of China’s corporate earnings, suggest that companies may also have had an artificial boost.

The less damning of the two is issued under the auspices of the Hong Kong Monetary Authority and written by Giovanni Ferri, of Italy’s University of Bari, and Li-Gang Liu of BBVA, a bank. It argues that the profits of China’s large state-owned companies are entirely a product of subsidised financing by state banks, which lets them borrow much more cheaply than private or foreign firms (see chart).

To reach that conclusion the authors sifted through government data from 1999-2005. Mr Liu believes that such subsidies may have even increased since last summer, because the big state-owned enterprises have been the main beneficiaries of China’s economic stimulus. In the short term the subsidies will have boosted profits, not least compared with the firms’ credit-starved private peers. But in the longer term Mr Liu believes that the political component of the loans will mean capital is being allocated inefficiently, raising the prospect of future losses.

At least the academics are convinced that the profits are genuine, even if they are subsidised. But an exhaustive working paper by TJ Wong and Danqing Young, of the Chinese University of Hong Kong, and Xianjie He, of Shanghai University of Finance and Economics, reaches a more alarming conclusion. It suggests investors have little faith in the numbers.

To measure this they looked at Chinese firms before and after the country broke with its accounting traditions in 2007, adopting something akin to international accounting standards, which base valuations on market prices. They then dissected earnings in three ways. First, they compared how shifts in earnings correlated with shifts in share prices under the old accounting system and the new. An improvement in accounting practices should have meant a closer correlation between earnings and the performance of the share price. Not only did this not happen—there were some signs that things got worse.

Nor were there correlations between the share price and the shift in reported value of investment instruments, goodwill and the impairment of assets—all typically critical to an investor’s analysis. Lastly, the academics examined a nuance in the new standards that allowed Chinese firms to book profits by restructuring debt that was owed to affiliated companies. Before the change in accounting standards, this kind of debt restructuring was rare. Afterwards, it was common: more than 200 companies, or over 15% of those in the study, did it in 2007. This resulted in clear gains to earnings but no impact on share prices. So is there anything in the company reports that investors do consider to be meaningful? That, says Mr Wong, is the subject of the next study.

China's banks are an accident waiting to happen to every one of usFitch Ratings has been warning for some time that China's lenders are wading into dangerous water

By Ambrose Evans-PritchardPublished: 5:38PM BST 28 Jun 2009

China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected."With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.

"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear."Note the phrase "able to bear". Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China's monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's policy is loose (for China). New loans doubled in May from a year earlier, almost entirely to companies.China's Banking Regulatory Commission fired a warning shot last week. "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy," it said.

Unfortunately, 40pc of the "real economy" consists of exports, mostly to the US and Europe, the consequence of a mercantilist export model that has qcrashed and burned. Chinese exports were down 26pc in May.

World trade may be stabilizing at last after contracting at faster rate than during the early Great Depression. But it will not rebound fast in a world where the US savings rate has risen to a 15-year high of 6.9pc. A trade policy based on the assumption that debtors in the Anglosphere and Europe's Club Med can ruin themselves for ever is absurd.

Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

Reformers know what must be done to boost consumption. China needs a welfare revolution. But creating a social security net takes time, and right now Beijing is facing a social crisis as 20m jobless workers retreat to the rural hinterland.

So the regime is resorting to hazardous methods to keep excess factories humming: issuing a "Buy China" decree: using a plethora of export subsidies; holding down the price of coke, bauxite, zinc and other resources to lower production costs (prompting a complaint from America and Europe); and suppressing the yuan, again.

Protectionism is a risky game for a country that lives off global trade and runs a surplus near 10pc of GDP. Mr Pettis said he fears China is nearing its "Smoot-Hawley moment", repeating the US tariff blunder of 1930 that brought the world crashing down on Washington's head.

Two facts stand out about China's green shoots. While the Shanghai composite index is up 70pc since November, Chinese imports are down 25pc from a year ago. China is still draining real stimulus from the global economy.

If the world's biggest surplus state ($400bn) is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump.

A leading defence expert has projected that China will attack India by 2012 to divert the attention of its own people from "unprecedented" internal dissent, growing unemployment and financial problems that are threatening the hold of Communists in that country.

"China will launch an attack on India before 2012. There are multiple reasons for a desperate Beijing to teach India the final lesson, thereby ensuring Chinese supremacy in Asia in this century," Bharat Verma, editor of the Indian Defence Review, has said.

Verma said the recession has "shut the Chinese exports shop", creating an "unprecedented internal social unrest" which in turn, was severely threatening the grip of the Communists over the society.

Among other reasons for this assessment were rising unemployment, flight of capital worth billions of dollars, depletion of its foreign exchange reserves and growing internal dissent, Verma said in an editorial in the forthcoming issue of the premier defence journal.

In addition to this, "The growing irrelevance of Pakistan, their right hand that operates against India on their behest, is increasing the Chinese nervousness," he said, adding that US President Barak Obama's Af-Pak policy was primarily Pak-Af policy that has "intelligently set the thief to catch the thief".

Verma said Beijing was "already rattled, with its proxy Pakistan now literally embroiled in a civil war, losing its sheen against India."

"Above all, it is worried over the growing alliance of India with the US and the West, because the alliance has the potential to create a technologically superior counterpoise.

"All these three concerns of Chinese Communists are best addressed by waging a war against pacifist India to achieve multiple strategic objectives," he said.

While China "covertly allowed" North Korea to test underground nuclear explosion and carry out missile trials, it was also "increasing its naval presence in South China Sea to coerce into submission those opposing its claim on the Sprately Islands," the defence expert said.

He said it would be "unwise" at this point of time for a recession-hit China to move against the Western interests, including Japan. "Therefore, the most attractive option is to attack a soft target like India and forcibly occupy its territory in the Northeast," Verma said.

But India is "least prepared" on ground to face the Chinese threat, he says and asks a series of questions on how will India respond to repulse the Chinese game plan or whether Indian leadership would be able to "take the heat of war".

"Is Indian military equipped to face the two-front wars by Beijing and Islamabad? Is the Indian civil administration geared to meet the internal security challenges that the external actors will sponsor simultaneously through their doctrine of unrestricted warfare?

"The answers are an unequivocal 'no'. Pacifist India is not ready by a long shot either on the internal or the external front," the defence journal editor says.

In view of the "imminent threat" posed by China, "the quickest way to swing out of pacifism to a state of assertion is by injecting military thinking in the civil administration to build the sinews. That will enormously increase the deliverables on ground -- from Lalgarh to Tawang," he says.

Fear of influenceBy James Lamont and Amy KazminPublished: July 12 2009 23:06 | Last updated: July 12 2009 23:06Hambantota, in southern Sri Lanka, was a sleepy seaside village devastated by the 2004 tsunami. Famous for salt flats and a searing climate, it’s most celebrated building was a British-built watchtower, now home to a fisheries museum.

Gwadar, likewise, until seven years ago, was a fishing town in Baluchistan on Pakistan’s south-western shoreline. An enclave on the Arabian Sea given to Islamabad by the Aga Khan, it was not much thought of as a key staging point between central Asia and the Gulf.

Below: A military message from the new player on the blockToday these little-known towns are fast emerging on to a bigger political and economic map thanks to Chinese finance and engineering, which is upgrading their ports into world-class facilities. They are part of China’s so-called “string of pearls” – the ports, staging posts and hubs that analysts say describe expanding Chinese interests and diplomatic initiatives in south Asia. The outreach – or, to some, apparent encirclement – is underpinned by infrastructure projects, arms supplies, energy routes and diplomatic protection.

Nowhere is this development causing more disquiet than in India. As energy dumps and refineries, jetties and gantries emerge on neighbouring shores, New Delhi fears that Beijing is extending its power to control shipping lanes in the Indian Ocean and Arabian Sea – waves that it prefers to rule. The moves have the potential to intensify the competition – and scramble for resources – between the world’s fastest-growing big economies, both nuclear-armed powers.

EDITOR’S CHOICEChina accused of ‘predatory pricing’ tactics - Jun-14China blocks ADB India loan plan - Apr-10India follows China’s path in Africa - Apr-08Chinese dragon roars over Indian industry - Jan-16Analysis: India and China’s taste for luxury - Jan-10The right questions on India and China - Feb-06Arundhati Ghose, India’s former ambassador to the UN, says Beijing’s manoeuvring in south Asia is “causing us a lot of disquiet”. China is “flexing its muscles,” she says. “What they want to do is say ‘We are the big boys here and Asia can only afford one power’ ... The message is that the power in Asia is China, and this is her periphery, and China is the one which will determine what is going to happen here.”

Beijing insists that its intentions are peaceful, aimed at development.

Relations between the two sides have never recovered since a short-lived border war almost half a century ago. In June 1962, Chinese forces overran mountain regions in a bitter, high-altitude conflict.

The episode brought an abrupt end to the vision of Jawaharlal Nehru, India’s first prime minister, of brotherhood between the two countries. It also deeply wounded India’s confidence that it could defend itself.

Today, the cool relationship across the Himalayas continues to do harm. Trade between Asia’s two most powerful emerging markets may have grown, yet distrust allows neither to drop its guard. The territorial dispute still rankles, emblematic of a broader, and potentially more dangerous stand-off stirred by economic dynamism and rising military might.

While the People’s Daily, the mouthpiece of Chinese Communist party, claims Indians view China’s accomplishments with “awe”, Manmohan Singh, India’s prime minister, and his country’s corporate leaders boast that India’s democracy has more staying power than China’s one-party rule.

Friction has risen recently with the two sides sparring over multilateral loans, India’s civil nuclear deal with the US, and trade.

One of the most striking disagreements is China’s holding up approval of the Asian Development Bank’s loan assistance plan to India, on the grounds that it involved finance to territory it claims in India’s north-east. The Chinese opposition to the $2.9bn (€2.1bn, £1.8bn) plan – which earmarked $60m for flood management in the disputed region – is unusual and has left bank officials aghast at the treatment of India, its largest borrower. The Chinese have expressed “strong dissatisfaction” with the ADB saying it had no chance of changing “immense territorial disputes.”

Similarly, China sought to block India’s access to the nuclear supplies as the US administration of former president George W. Bush pursued a civil nuclear deal with New Delhi. That deal brought India’s nuclear programme out of decades of international isolation and was a milestone in its coming of age as a big power.

New Delhi has found ways to hit back. One weapon is trade. India has imposed bans on Chinese-made toys and mobile telephones. Another is troop deployment. It has recently aggravated China by bolstering its forces on the Himalayan border.

But while India can stem the tide of goods, it can do little about what it sees as regional encroachment in newly triumphant Sri Lanka, military-ruled Burma and arch rival Pakistan, and even the former mountain kingdom of Nepal.

Indian defence officials eye China’s activities in Sri Lanka with particular concern. – not least as the island overlooks important shipping lanes that carry much of the world’s oil trade.

Special relationship: Chinese and Pakistani troops on a drill in Karachi. The two nations share a common regional rival in IndiaChinese military ordnance was decisive in the final stages of Colombo’s war against the Tamil Tigers, defence experts say. Beijing has increased its aid to Sri Lanka fivefold to $1bn a year and stepped up supplies of sophisticated weapons such as Jian-7 fighter jets, anti-aircraft guns and air surveillance radar.

As well as an arms supplier, China also served as important diplomatic ally to Sri Lanka, helping to deflect western criticism at the United Nations of Colombo’s human rights record in defeating the Tamil Tigers, which cost thousands of civilian lives.

“On both counts – diplomacy and arms supply – China has rendered invaluable help to Sri Lanka in its war effort against the Tamil Tigers,” says R. Hariharan, a retired colonel turned political analyst. Sri Lanka’s president, Mahinda Rajapaksa, cemented relations in 2007 by awarding Chinese companies the contracts for developing the Hambantota port, in his home constituency. The port, deeper than the one at Colombo, the capital, would provide docking and refuelling facilities for, among others, Chinese merchant and naval ships.

Such efforts, says Col Hariharan, could see Sri Lanka emerge as “a friendly cockpit” from which to keep an eye on key shipping lanes – yet another concern for India, which sees the island is the southern vanguard of its strategic defence.

To India’s east, China has emerged as the closest ally and international protector of Burma’s isolated military junta, which is shunned by most western governments and subjected to sanctions. China is Burma’s largest trading partner, and was long rumoured to have a listening post in southern Burma on the Bay of Bengal.

“I don’t think there is some nefarious Chinese scheme on Burma, but with western sanctions, there has been a vacuum in Burma and China has been happy to fill that vacuum,” says Thant Myint-U, an authority on the relationship between Burma, China and India.

Beijing, which has repeatedly shielded Burma in the UN Security Council, is being repaid with access to some of Burma’s rich trove of natural gas at “friendship” prices, according to some Burmese analysts. China is beginning the construction of a pipeline that will carry oil from Sittwe, on the Bay of Bengal, to China.

For Indian policymakers – some of whom still recall when Mandalay, Burma’s second city, was the eastern-most city in British India – Beijing’s close ties to the Burmese generals are a cause of deep concern.

“In Burma, the most atrocious and evil government is supported by China, and India has no choice but to do something about it so we are not totally zero there,” said one senior retired Indian diplomat, who asked not to be identified. “But we can’t be party to people [China] wounding and needling an animal in our forest and then leaving us to handle the wounded tiger.”

China is also allied to what many Indians consider their greatest threat: nuclear-armed Pakistan. Beijing provides financial and technical support to Islamabad and is described by some western diplomats as the Islamic republic’s most special relationship. Relations have deepened over the 40 years since Pakistan was slapped with US economic and military sanctions following its 1965 war with India.

“Pakistan considers China a well-trusted friend. There are virtually no issues between us,” says a Pakistani foreign ministry official.

The Gwadar port project, one of the highest-profile examples of Chinese assistance, envisages a naval anchor, and transport and energy transhipment links reaching all the way to Xinjiang province in China’s west.

China has also emerged as Pakistan’s largest supplier of defence hardware, and is helping renew the country’s jet fighter strike force.

Such links have prompted India’s more hawkish commentators, traditionally focused on the threat from Pakistan, to turn their attention to their more powerful neighbour. Some warn that China is an unstoppable results-driven business machine with little time for democratic niceties. “Each mayor and party secretary has objectives relating to investment, output and growth, which are aligned to national goals,” says Gurcharan Das, a Delhi-based political analyst and former chief executive of Procter & Gamble India.

Naresh Chandra, India’s former ambassador to the US and former cabinet secretary, says Beijing has little interest in partnering with New Delhi to develop a common regional approach.“They fail to recognise their own power to do good in Asia. Their entire thinking is based on the People’s Liberation Army” he says.

New Delhi’s anxieties have been exacerbated by growing deference to Beijing by western powers, particularly the US, who look to China’s economic dynamism to rescue the global economy from its current crisis.

“We are not in a position to take them on militarily, economically and now not even politically,” says Ms Ghose. “The only option we’ve got is diplomatic. At the moment, the US is of no help. ”

Many Indian officials prefer to be more bland in their comments about China, and its “string of pearls”. Kamal Nath, a senior cabinet minister and former trade negotiator, says India and China follow two different models but need not be antagonistic in pursuit of growth and power.

“It cannot be India versus China. It has to be India and China,” he says.

Additional reporting by Joe Leahy and Farhan Bokhari

A MILITARY MESSAGE FROM THE NEW PLAYER ON THE BLOCK

After the return of the Chinese naval expedition to fight piracy off the Somalia coast in May, Rear Admiral Du Jingchen, the commander of the fleet, declared the mission accomplished. “It was safe, smooth and satisfactory,” he said.

In truth, for China and the countries clustered around the Indian Ocean, the mission was much more, writes Richard McGregor.This was the first time Beijing had used its navy to escort vessels sailing under its national flag at such a distance from its homeland. The fact that Chinese ships transited through the Indian Ocean, an area New Delhi regards as its backyard, gave the event an extra geopolitical edge.

“The Indian Ocean is very important – it gives [China] a broader space,” says Bud Cole, a professor at the National War College, and an expert on the Chinese navy.

Like most displays of Chinese power, the naval mission said more about the future of Beijing’s influence than its authority today. The navy has little capability to conduct sustained missions far from home. As Mr Cole points out, it has only a handful of supply ships essential to such missions, and is not rushing to build many more.

But there is little doubt Beijing harbours long-term ambitions to build a navy with a capability that matches both its ambitions to be a great power and its swelling global economic interests.

The People’s Liberation Army and its naval wing moved beyond a singular focus on Taiwan “several years ago”, according to Alex Huang, of the Center for Strategic and International Studies in Taipei. “They are sending a message that the Chinese navy is going places, and that they are the new player on the block.”

Rear Admiral Yin Dunping, the vice-commander of the anti-piracy expedition, said in an interview on the mission’s conclusion that China needed a strong navy to safeguard its national interest.

“It is important to accelerate and improve the navy’s abilities to cross the ocean [to] escort, rescue and evacuate Chinese nationals abroad, maintain peace, and a variety of other military tasks,” he told Xinhua, the state news agency.

It is not just India and its neighbours that are feeling the effects of China’s rise. The US and its allies in the Pacific, including Japan, Australia and the Philippines, have all been forced to adjust their strategic outlook to take account of Beijing’s ambitions.

But few regions have been so methodically mapped out by China as the Indian Ocean and its environs, where Beijing has built or financed ports from Burma to Pakistan to draw a line of influence – the so-called “string of pearls” – from south-east Asia all the way to the Middle East.

Every new display of the navy’s latest hardware is accompanied by a statement from the Beijing leadership reassuring neighbours about China’s desire for peace and co-operation.

But as military strategists have long known, China’s mere presence in the region is a statement in itself. Once it is accompanied by military hardware, the power of the message will only be redoubled.

Boxun reports that most people assumed Hu Jintao left the G8 meeting in Italy early to return home because of the ongoing violence in Xinjiang. In fact he rushed back because He Guoqiang--head of the Central Commission for Discipline Inspection--had taken the opportunity of Hu's absence to detain Li Keqiang's two secretaries on corruption charges. In fact Li's assistants have accepted bribes to the tune of tens of millions of dollars. But this is a common phenomenon.

He Guoqiang took advantage of Hu's absence to spring his trap, having Premier Wen Jiabao sign off on the incriminating evidence and arrest warrant. Hu used the excuse of the events in Xinjiang to rush home to attend to this threat to his desired heir to the Party leadership position.

The world's second largest, fastest growing economy and most populated country, but the inevitability that it will soon overtake the US as we enter the 'Age of China' deserves a little skepticism. I don't agree 100% with this author but appreciate his key points including the historical perspective and the conclusion that our focus should be on getting our own house in order and then competition with China will go just fine for the U.S.

Overblown announcements heralding the supposed coming of the Age of China have become a staple of journalistic futurism in recent years. When Maclean's magazine banners across the top of its cover "When China Rules the World," as it did last month -- and it is not a Monty Python send-up of swarms of incomprehensible people in Mao suits -- I know it is time to raise a peep of dissent.

Does any of this sound familiar? It was not even 20 years ago that the same was being said about Japan, when U. S. president George H. W. Bush went to Tokyo and was patronized by the Japanese prime minister for being at the head of a declining power. At an official dinner, the president vomited and returned to his embassy in an ambulance (but explained privately that his indigestion was the consequence of eating plain fish while facing Chrysler chairman Lee Iacocca for two hours).

And it was only 15 years before -- during the Carter doldrums, following the Kennedy assassinations and the debacles of Vietnam and Watergate -- that the world was abuzz with predictions that the U. S. S. R. would surpass the United States.

In fact, the most serious threat came from the Nazis. The official borders of Germany at the end of 1940, including Austria, Bohemia (the Czechs), Moravia, most of Poland, Denmark, Norway, Benelux and the Atlantic coast of France, gave the Reich 130 million people, the same population as the United States, and almost equivalent industrial potential. This was why Roosevelt ran for a third term, determined to help keep Britain (and Canada) in the war, and to assist all who resisted the Nazification of Europe. The Nazi threat was so serious that it required the entire combat strength of the British Commonwealth, the U.S. and the U.S.S.R. to defeat it.

In the Cold War that followed, the Soviet challenge simply imploded, crumbled, after 40 years of containment by a U. S.-led alliance, in which no fire was exchanged between the major powers. As for Japan, it simply ran out of steam, lost a whole decade in financial stagnation while its stock market declined by 90% -- even though it continued, to this day, to be a brilliant manufacturer and marketer of automobiles and many sophisticated products from cameras to television equipment.

None of this means that China won't continue to rise, or that the U. S. won't again have to prove its staying power as a world force. But matter-of-fact assertions, complete with timetables, of an imminent Chinese assumption of world leadership, are rubbish.

The takeaway message on the failure of the brief era of U. S. unipolarity that followed the demise of the U. S. S. R. is not that the U. S. is finished as the world's leading country, but that multipolarity, not the hegemony of a sole superpower, will replace the bipolarized Cold War. There are about 40 reasonably important countries in the world (of a total of 192), and the major powers will compete to build relations within that group.

The theory of the inevitable rise of China is similar to the recent theory of the inevitable end of the U. S. as a mainly Caucasian country: It is based on the extrapolation of current statistics that will not continue, and that in the case of the Chinese economy, are a fiction anyway.

China has a centrally directed economy, and calculates growth rates as a function of production, not spending; and production is deemed to occur when it is commissioned by the state. Thus, all Chinese predictions of economic growth are self-fulfilling: The central economic leadership orders production of toasters or submarines and announces construction of roads and sports stadiums, and the anticipated costs are added to the GDP at once. (In western countries, by contrast, GDP is the sum of consumption, investment, government spending and exports.)

The government monitors the progress of state construction and inventory levels, but doesn't release these numbers. It regularly claims 15% annual retail sales increases, but that reflects shipments to retail outlets, not sales, and even less, sales revenue. Such a system preserves some aspects of the catastrophic Soviet-style command economy. There are reports of consumer goods being virtually given away at point of sale, i. e., at below their cost of production.

All outsiders can do to judge the progress of demand is to see what the central bank does with credit and the money supply. The country has had a 21% decline in exports this year, so to achieve its 8% economic growth for 2009, there will have to be a 15% to 17% increase in domestic economic activity. There has been a strenuous effort to increase domestic demand, and the much-ballyhooed US$586-billion Chinese stimulus plan was really an excuse for the relaxation of credit and the redesignation of categories of already approved expenses.

The money-supply increase for this year is a very audacious 34.5%, to stimulate domestic demand. The two Shanghai stock exchanges almost doubled (before a recent 20% downturn) and major city residential prices are up around 13% so far this year. So bubbles are clearly developing. The country's claimed savings rate of 50% is not real, because it includes provision for all health care, retirement benefits and other social spending that is provided by the state in most western countries.

China claims to be expanding health care and other social services, but has not allocated realistic amounts to accomplish this. The country also has no credible legal system, and is rife with corruption (as evidenced by the shoddily built schools -- used as shelters during the recent earthquakes -- which were built on the cheap with no structural steel, and then collapsed, killing thousands of people). It has one billion peasants who largely live as they did 3,000 years ago. Almost every great urban development attracts swarms of expropriated people throwing rocks at bulldozer drivers, and the Chinese navy regularly steals the catches of commercial fishermen. The one-child-per-couple policy is creating an ageing and male-unbalanced population. It is a rough country, oscillating between near chaos and Tiananmen-like exertions of authority.

The rise of China is impressive and an objectively good thing, and the United states is labouring. But the U. S. has a functioning, if conspicuously imperfect, political and legal system, formidable resources, an incomparably productive work force, nearly four times China's GDP, and a popular culture that dominates the world. It must put its house in order, which will be painful, but a trifle compared to the challenges facing China. The United States has seen off greater challenges than this.

Despite the problems within China, as articulated above they are educating a lot of children to be at the cutting edge of technology while our schools are churning out illiterates with overinflated self images and a vague loathing of America.

A story linked below says China is nervous about the US printing money. That, I assume, is a world class understatement - they hold $2 trillion already and must feel like they are in quite a box to have to keep buying to protect their previous investments.

As I read the article, the meaning quickly turned upside down for me. The US is in a lousy position economically right now, but China it seems to me is in an even more precarious situation because their bubble has continue to inflate even further and has yet to burst or correct.

From the story: "Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise. Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

In one of today’s richest ironies, America’s fiscal health — such as it is — hinges on the generosity of the Chinese Communist party. Annoying Beijing’s mandarins could prompt them to skip our Treasury auctions. If China stops lending the Treasury money to underwrite Uncle Sam’s spendaholism, the Federal Reserve will need to print even more dollars to nudge the day of reckoning back over the horizon.

The Chinese have urged Washington to stop spending and printing so much money, lest inflation turn China’s $800.5 billion in Treasuries into a giant misfortune cookie. Chinese officials have grown increasingly vocal — and decreasingly diplomatic — in asking the U.S. government to start practicing fiscal discipline.“If they [the Fed] keep printing money to buy bonds, it will lead to inflation, and after a year or two the dollar will fall hard,” predicts Chen Siwei, former vice chairman of the Standing Committee of the Chinese National People’s Congress and now its green-energy guru. “Most of our foreign reserves are in U.S. bonds, and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.” Ambrose Evans-Pritchard of London’s Daily Telegraph reported September 6 on Siwei’s remarks at the European House-Ambrosetti’s economic forum in Cernobbio, on Italy’s breathtaking Lake Como.

“Gold is definitely an alternative, but when we buy, the price goes up,” Siwei continued. “We have to do it carefully so as not to stimulate the markets.”

In other words, like a panda bear in a jewelry shop, China is tiptoeing away from the dollar and into gold, and doing so quietly enough not to rattle commodity and currency traders. This month, China also bought $50 billion in Special Drawing Rights, the International Monetary Fund’s brand-new Esperanto currency that blends euros, pounds, yen, and dollars.

Obama should shift into reverse. He should use his formidable persuasive skills to secure an immediate spending moratorium, slash the budget across the board by, say, 20 percent, and set future expenditures at or below inflation. If he cannot do this, America will have little choice but to keep the Chinese Communists cheerful and eager to buy U.S. bonds.

But rather than pursue the fiscal conservatism counseled by Siwei and other sober Chinese — or just keep Beijing calm and cooperative — Obama did something supremely idiotic: On September 11, he launched a trade war with Beijing.

For the next three years, Chinese tires will face a 35 percent import duty. This is like slashing your banker’s steel radials just before handing him your home-mortgage application. Fiscal recklessness aside, this is dreadful trade policy.

First, no surprise, the target of protectionism retaliated. China immediately commenced anti-dumping actions against U.S. chickens and auto parts. Americans in those industries soon will suffer.

So, too, Cooper Tire and Goodyear. These U.S. companies manufacture tires in China and now will pay a 35 percent tariff on each one they ship home.

In yet another irony, Obama promised to be the multilateral, consensus-building antidote to the venomous George W. Bush and his allegedly go-it-alone, my-way-or-the-highway diplomacy. Today, Barack Obama looks like quite the unilateralist.

— Deroy Murdock is a columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution at Stanford University.

Copied here for follow up. "For China I think the situation is the opposite of Russia. They are highly dependent on the US economy, the dollar and the value of their already sunken investment."

GM:"I disagree Doug. China has us by the short and curlies. They couldn't build a military that could defeat ours for the amount of money they used to buy our debt. Now, they are using their financial leverage to bend us to their will. Unrestricted warfare, financial edition."----

That's good. We haven"t had enough disagreement around here since the French supermarket uprising.

Based on the size of the Chinese investment in the dollar already and the importance that US purchases of Chinese goods plays in their economy and based on my personal conjecture that their economic growth is built partly on a house of cards...

I just have to believe they are more worried than we are about whether the economic scare of the past year could turn sharply further for the worse and whether their political system, with a hundred people ruling a billion, would survive the chaos of a severe and prolonged economic crisis. jmho

That said, they are of course our competitor and arch-rival in every other market in the world and somewhere between annoyance and enemy on nearly all matters of geopolitics.

But they don't win by crushing us economically. They win more like a parasite feeding off of us as I see it.

Does internal instability scare the politburo? Yes, but that's why they have a police state that has made clear since 1989 that they will kill as many Chinese citizens as needed to retain control. There is no alternate government waiting in the wings, and given the rise of China in the new era of American weakness, Hong Kong, and especially Taiwan have much to fear.

China's dissidents are voicing unease about President Barack Obama's Nobel Peace Prize, saying that the award could have been effective in promoting human rights in their country. Some in China's democracy movement are outraged at what they see as a weak stance on rights by Obama, who the same week as Friday's announcement avoided a meeting with Tibet's exiled Dalai Lama that would have upset Beijing.

Chinese activists had been tipped as Nobel contenders on this year of anniversaries, when China marked 60 years of communist rule, 50 years since the Dalai Lama's flight and 20 years since the crushing of the Tiananmen Square democracy uprising.

Potential laureates included Hu Jia, locked up since December 2007 after exposing government abuses and the plight of China's AIDS sufferers, and Wei Jingsheng, a onetime electrician who spent 18 years in prison after brazenly challenging former leader Deng Xiaoping to bring democracy.

Huang Ciping, an engineer turned activist who is executive director of Wei's Washington-based foundation, said that China "has come to such a turning point that the prize might have helped."

"The Nobel Peace Prize committee has the full right to decide to give coal to those who suffer and struggle or to present flowers to the powerful," she said.

But she said of the decision: "It is both a pity for the Chinese people and a danger to world peace."

Rebiya Kadeer, the exiled leader of China's Uighur minority, congratulated Obama but called on him to use the added prestige to put pressure on "dictatorships like China."

"I am very happy that he got it. Now he has to do something with the award. It raises expectations on him to stand up for oppressed nations," she told AFP.

Some 200 people died in July in clashes between Uighurs and China's majority Han in the country's worst ethnic bloodletting in decades.

Harry Wu, who spent nearly two decades toiling as a political prisoner and now tries to publicize the "laogai" prison camp system, said the Norwegian Nobel committee's decision was premature.

"Maybe at this moment, Obama's actions on peace and human rights do not seem too bad, but so far I do not think it is enough to prove that he is qualified as the Peace Prize winner," Wu said.

Obama nearly said as much in his humble statement on the award, in which he said: "To be honest, I do not feel I deserve to be in the company of so many of the transformative figures who have been honored by this prize."

But some exiled Chinese said the prize was not only premature but undeserved, pointing to the Obama administration's statements that human rights concerns will not hold back a growing relationship with China.

James B. Chen, a cancer researcher at the University of Arkansas, feared that the award could be seen as affirmation of focusing on economic ties with China or of Obama's decision to avoid the Dalai Lama.

"For nearly all of my friends, their first reaction was that they were very, very disappointed," Chen said. "They thought this is a major setback for human rights."

The White House has denied it snubbed the Dalai Lama, saying Obama will meet him after the president visits China next month.

The Dalai Lama is paying his first visit to Washington since 1991 that does not include a meeting with the president. But he said he had no hard feelings and sent a congratulatory letter to Obama.

The Tibetan monk, who won the Nobel Peace Prize in 1989 despite strong Chinese protests, told Obama that "the founding fathers of the United States have made this country the greatest democracy and a champion of freedom and liberty.

"It is, therefore, important for today's American leaders to adopt principled leadership based on these high ideals," he said.

"Such an approach will not only enhance the reputation of the United States, but also contribute tremendously to reducing tension in the world."

I note that Japan, which ran huge surpluses in the 1970 and 80s, similarly diversified off-shore-- and then it crashed and has not really recovered since then.

I'm not looking to be glib here, but I also think it important we not panic. China's books are seriously cooked. Due to its one child policy, it has a unique demographic profile where the old increasing outnumber the young-- and the disproportion between male and female children is the highest in the world (due to abortions of girl babies because of the one child policy)-- if the TV piece I recently saw is true, the ratio is something like 13/10!

China isn't just trying "cash for clunkers" vote buying like we are. They are positioning chess pieces on the global board. Our leadership is thinking "bread and circuses" to buy votes for 2010/2012. China is thinking generations ahead on their timeline.

Unlike us, the old don't have a vote in China. No need for the bastards in Beijing to appease them. China, above all will act to preserve stability, no matter the cost in lives.

BO and his ilk believe that their charisma and kumbayas will make the world a safe place. We will pay for this delusion in blood, possibly we will cease to exist as a result. Other countries most certainly will.